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LTRARY 
iRVINf 


ELECTED  READINGS  IN 
INTERNATIONAL  TRADE 
AND  TARIFF   PROBLEMS 


COMPILED  BY 


FRANK  WILLIAM  TAUSSIG,  Ph.D.,  Litt.D.,  LL.D. 

HENRY    LEE    PROFESSOR    OF^ECONOMICS    IN    HARVARD   UNIVERSITY 

SOMETIME    CHAIRMAN   OK   THE    UNITED    STATES 

TARIFF   COMMISSION 


GINN  AND  COMPANY 

BOSTON     •     NEV\^   YORK     •    CHICAGO     •     LONDON 
ATLANTA     •     DALLAS     •    COLUMBUS     •     SAN    FRANCISCO 


COPYRIGHT,  1921,  BY  FRANK  WILLIAM  TAUSSIG 
ALL  RIGHTS  RESERVED 

621.9 


/O0-] 


Cfte   jatbengum   fivtii 

GINN  AND  COMPANY-  PRO- 
PRIETORS •  UOSTON  •  U.S.A. 


INTRODUCTION 

This  volume  of  selections  is  intended  primarily  for  use  in  uni- 
versity and  college  courses  on  international  trade  and  tariff  problems. 
It  is  designed  to  present  for  discussion  the  underlying  questions  of 
principle  and  the  ways  in  which  they  have  been  dealt  with  by  writers 
of  different  schools.  I  hope  that  it  will  also  have  some  wider  in- 
fluence, by  bringing  to  the  attention  of  economists,  as  well  as  of 
students,  aspects  of  the  subject  which  are  often  neglected.  The 
debate  on  protection  and  free  trade  has  been  commonly  carried  on 
in  most  superficial  fashion,  ignoring  the  fundamental  principles  of 
international  trade  and  ignoring  also  some  of  the  most  perplexing 
problems  of  commercial  policy.  It  has  seemed  to  me  desirable  to 
stimulate  intellectual  interest  by  calling  attention  to  the  really  diffi- 
cult and  debatable  questions ;  and  with  this  end  in  view  selections 
have  been  incorporated  on  phases  of  the  subject  not  touched  in  the 
newspapers  and  the  party  platforms.  The  free  range  of  the  selec- 
tions may  add  to  their  interest  not  only  for  students  but  for  the 
general  reader  who  is  weary  of  the  everyday  platitudes. 

The  volume  will  suffice  as  the  sole  textbook,  or  the  sole  required 
reading,  in  a  substantial  university  course  on  its  subject.  It  can  be 
used,  however,  as  supplementary  reading  where  a  single  textbook  of 
the  usual  type  forms  the  backbone  of  the  instruction.  While  pri- 
marily for  use  in  universities  and  colleges,  where  emphasis  may  be 
expected  to  be  given  to  the  strictly  economic  aspects  of  the  subject 
rather  than  to  the  business  aspects,  the  volume  should  prove  useful 
also  in  courses  given  in  business  schools.  These  latter  too  often  are 
devoid  of  any  consideration  of  the  economic  principles  and  would 
be  improved  by  a  widening  of  their  scope. 

As  the  table  of  contents  indicates,  the  book  is  divided  into 
three  parts. 

Part  I  takes  up  the  theory  of  international  trade.  The  list  of 
writers  begins  with  Ricardo  and  runs  mainly  through  the  British 
economists  t)f  the  nineteenth  century.    It  is  not  from  any  special 


vi  INTRODUCTION 

predilection  for  the  British  school  that  I  have  been  led  to  include  so 
large  a  proportion  of  contributions  from  this  source.  The  explana- 
tion is  that  nowhere  else  is  there  to  be  found  a  well-reasoned  state- 
ment on  the  fundamentals.  The  analysis  of  this  phase  of  economics 
constitutes  probably  the  most  enduring  contribution  made  by  the  so- 
called  classical  writers.  The  literature  of  no  other  country  contains 
any  comparable  contribution  to  the  theory  of  international  trade. 
The  student  who  would  secure  command  of  the  only  sustained  and 
consistent  exposition  that  has  ever  been  made  must  still  turn  chiefly 
to  the  British  writers. 

Part  II  is  on  the  controversy  between  free  trade  and  protection, 
and  particularly  on  the  arguments  advanced  pro  and  con.  Beginning 
with  Adam  Smith,  it  proceeds  to  writers  of  other  countries  than  Great 
Britain,  and  to  schools  of  thought  different  from  the  British.  Some 
of  the  strongest  and  most  effective  reasoning  in  favor  of  protection 
has  come  from  Germans ;  and  not  only  Germans  of  the  mid- 
nineteenth-century  period,  like  List,  but  of  the  modern  school  of 
German  economists.  Among  these,  Wagner  and  Brentano  are  well 
known ;  others,  like  Schiiller  of  Vienna,  are  much  less  known  to 
English  readers.  A  representative  of  the  now  dominant  French  at- 
titude is  found  in  Meline,  whose  report,  here  reprinted,  was  made  in 
connection  with  the  great  overturn  of  French  tariff  policy  that  took 
place  under  his  leadership  in  1892. 

Part  III  deals  with  the  protective  controversy  in  the  United  States. 
Here  also  the  selections,  while  largely  from  familiar  sources,  come 
in  part  from  others  not  generally  known.  Hamilton's  Report  on 
Manufactures,  of  1791,  has  probably  been  more  frequently  referred  to 
than  any  public  document  which  has  appeared  on  this  subject  in  the 
United  States.  Gallatin's  free-trade  memorial  of  1 831,  on  the  other 
hand,  is  comparatively  little  known,  yet  no  less  deserving  of  attention. 
The  two  between  them  represent  the  divergent  views  of  statesmen  of 
the  early  generation.  As  representative  of  the  character  of  the  Amer- 
ican controversy  in  the  middle  of  the  nineteenth  century,  selections 
have  been  drawn  chiefly  from  Clay  and  Webster.  Some  of  these, 
again,  are  well-known  utterances  of  the  two  statesmen ;  others  are 
from  writings  and  speeches  of  theirs  less  frequently  referred  to. 
Among  public  men  of  more  recent  times,  Cleveland  and  McKinley 
have  been  chosen  as  representatives  of  the  two  extremes  of  opinion. 


INTRODUCTION  Vii 

Cleveland's  message  of  1887  and  McKinley's  speech  of  1888  are  the 
two  most  significant  utterances  of  their  period.  The  same  is  true 
of  T.  B.  Reed's  speech,  which  presents  the  argument  for  protection 
in  terms  reminiscent  of  Henry  C.  Carey,  yet  with  a  vigor  and  skill 
of  its  own. 

Not  all  of  these  extracts  have  been  procured  without  difficulty. 
The  translations  from  the  German  have  been  made  for  this  volume 
under  my  supervision,  I  have  already  referred  to  the  fact  that  the 
writings  of  Schiiller  are  almost  unknown  in  English-speaking  coun- 
tries, yet  deserve  attention  because  of  their  systematic  and  con- 
sistent statement  of  the  case  for  protection.  The  Meline  Report 
of  1892  has  been  extracted  from  a  bulky  set  of  documents  on  the 
French  tariff  proceedings  of  that  time,  which  I  succeeded  in  un- 
earthing at  the  Bibliotheque  Nationale  in  Paris.  Marshall's  memo- 
randum on  the  fiscal  policy  of  international  trade  has  not  been 
previously  reprinted,  so  far  as  I  know,  from  the  British  Parliamentary 
papers.  Cleveland's  message  of  1887  and  McKinley's  speech  of  1888 
are  taken  from  volumes  probably  to  be  found  in  large  libraries, 
yet  not  accessible  to  most  readers.  Webster's  early  utterance  on  the 
tariff,  characteristic  of  the  period  before  181 6,  is  taken  from  the 
Annals  of  Congress ;  it  is  not  in  the  six  volumes  of  his  collected 
writings. 

It  has  seemed  to  me  best  to  offer  not  a  large  number  of  short  selec- 
tions but  a  moderate  number  of  longer  ones.  Compendiums  of  this 
sort  are  at  best  in  danger  of  being  disconnected  and  scrappy  and  so 
of  hindering  rather  than  promoting  sustained  consideration  of  the 
essential  matters.  The  danger  is  increased  when  many  brief  pas- 
sages are  taken  from  a  wide  range  of  sources.  While  a  more  complete 
indication  of  the  varying  shades  of  opinion  may  be  secured  by  the 
inclusion  of  many  authors  and  many  selections,  the  main  principles 
are  likely  to  be  obscured.  No  collection  of  extracts  can  have  the 
unity  and  consistency  of  an  exposition  which  comes  from  a  single 
hand,  but  I  have  endeavored  to  minimize  the  inherent  difficulties  by 
selecting  for  this  volume  passages  each  of  which  develops  its  own  rea- 
soning with  some  fullness  and  is  logically  related  to  what  precedes  or 
what  follows. 

For  purposes  of  instruction  not  all  the  selections  are  equally  serv- 
iceable, nor  is  the  order  in  which  they  are  arranged  necessarily  the 


viii  INTRODUCTION 

best  for  the  student's  reading.  The  very  first  of  all,  for  example — 
that  from  Ricardo — may  be  used  in  different  ways,  or  not  at  all, 
according  to  the  training  and  capacity  of  the  student  or  reader. 
Ricardo's  chapter  is  a  remarkable  intellectual  performance,  contain- 
ing in  his  compact  and  often  obscure  fashion  the  gist  of  what  is 
elaborated  with  high  literary  skill  in  the  series  of  chapters  by  Mill. 
For  those  who  are  new  to  economic  theory  and  to  Ricardo,  the  best 
plan  is  to  read  his  chapter  after  having  gone  through  those  of  Mill, 
even  though  chronologically  it  comes  before  them.  Indeed,  if  there 
be  little  interest  in  the  genesis  and  development  of  the  cardinal 
doctrines,  it  can  be  omitted  altogether.  In  other  respects  also  the 
teacher  or  reader  will  pick  and  choose  for  himself,  and  select  his 
own  order.  Some  of  the  digressions  in  Adam  Smith's  chapters  can 
be  simply  noted  as  digressions  and  skipped.  It  has  seemed  to  me 
due  to  the  great  Scotchman  to  present  the  famous  attack  on  the 
mercantile  system  as  he  wrote  it ;  and  the  student  who  would  know 
what  manner  of  treatment  he  will  find  throughout  the  "Wealth  of 
Nations"  should  read  these  chapters  as  they  stand.  Yet  if  time  is 
short  and  compression  essential,  omission  can  be  made  without  a 
break  in  the  train  of  reasoning.  The  passages  from  Hamilton  and 
Gallatin  have  already  been  shortened  from  the  somewhat  lengthy 
originals.  Like  most  of  the  utterances  from  Americans  they  have 
largely  an  historical  interest,  illustrating  the  course  of  the  protective 
controversy  in  this  country  rather  than  contributing  anything  new 
on  the  fundamentals.  All  may  be  treated  with  freedom,  according 
to  the  plan  and  purpose  with  which  the  volume  is  used. 

I  am  indebted  to  Dr.  Rufus  S.  Tucker,  of  the  staff  of  the  Depart- 
ment of  Economics  in  Harvard  University,  for  great  aid  in  putting 
this  volume  through  the  press.  He  has  given  most  helpful  sugges- 
tions on  the  selection  of  the  material,  has  supervised  the  manuscript, 
and  has  seen  to  the  accuracy  of  the  translations.  All  proofreading 
has  been  attended  to  by  him. 


CONTENTS 

PART  I :  INTERNATIONAL  TRADE 


CHAPTER 


PAGE 

I.  David  Ricardo  :    On  Foreign  Trade 3 

II.  John  Stuart  Mill  :   Of  International  Trade 20 

Of  International  Values 29 

Of  the  Foreign  Exchanges 45 

Of  the  Distribution  of  the  Precious  Metals  through  the 

Commercial  World 52 

Effects  produced  on  International  Exchange  by  Duties  on 

Exports  and  on  Imports 62 

III.  John  Elliot  Cairnes  :   On  Some  Minor  Topics 70 

The  Australian  Episode 81 

IV.  Frank  William  Taussig  :    Wages  and  Prices  in  Relation  to 

International  Trade 105 

The  Principle  of  Comparative  Advantage 125 

V.  John  Elliot  Cairnes  :   International  Values 143 

VI.  C.  J.  Bullock,  J.  H.  Williams,  and  R.  S.  Tucker  :    The 

Balance  of  Trade  of  the  United  States 159 

VII.  Frank  William  Taussig  :    The  Present  and  Future  of  the 

International  Trade  of  the  United  States 207 

PART  II :  FREE  TRADE  AND  PROTECTION 

VIII.  Adam  Smith  :    Of  the  Principle  of  the  Commercial,  or  Mer- 
cantile System 221 

Of  Restraints  upon  the  Importation  from  Foreign  Coun- 
tries of  Such  Goods  as  can  be  produced  at  Home     .     .     244 
IX.  John  Stuart  Mill  :    Of  Taxes  on  Commodities    ....     265 
Of  Interferences  of  Government  grounded  on  Erroneous 

Theories 270 

X.  Friedrich  List  :    Introduction  to  the  National  System  of 

Political  Economy 277 

The  National  Distribution  of  Business  Operations  and  the 

Union  of  the  National  Productive  Forces 287 

ix 


X  CONTENTS 

CHAPTER  PAGE 

XI.  Frederic  Bastiat  :    Economic  Sophisms 300 

XII.  F.  J.  Meline  :   Report  of  the  Tariff  Commission     ....     316 

XIII.  Adolf  Wagner  :  Agrarian  State  versus  Manufacturing  State     343 

XIV.  Richard   Schijller  :     Effect   of   Imports   upon   Domestic 

Production        371 

XV.  Lujo  Brentano  :   The  Terrors  of  the  Predominantly  Indus- 
trial State 392 

XVI.  Alfred  Marshall  :    Memorandum  on  the  Fiscal  Policy  of 

International  Trade 417 

« 

PART  III:   THE  PROTECTIVE  CONTROVERSY  IN  THE 
UNITED  STATES 

XVII.  Alexander  Hamilton  :  Report  on  Manufactures  ....  454 

XVIII.  Albert  Gallatin  :  Free  Trade  Memorial 480 

XIX.  Daniel  Webster  :  Speech  on  the  Repeal  of  the  Embargo, 

April  6,  1814 505 

Speech  upon  the  Tariff,  April  i  and  2,  1824     ....  508 
Speech  on  the  Bill  to  reduce  the  Duties   on  Imports, 

July  25  and  27,  1846 S12 

XX.  Henry  Clay  :    Speech   on  American  Industry,   March   30 

and  31,  1824 517 

XXI.  John  Quincy  Adams  :   Report  of  the  Committee  on  Manu- 
factures, May  21,  1832 520 

XXII.  Grover  Cleveland  :    Message  to  Congress  of  December  6, 

1887 528 

XXIII.  William  McKinley:  Speech  on  the  Mills  Bill,  May  18,  1888  536 

XXIV.  Thomas  B.  Reed:  Speech  on  the  Mills  Bill,  May  19,  1888  554 


SELECTED  READINGS  IN  INTERNATIONAL 
TRADE  AND  TARIFF  PROBLEMS 


PART  I 
INTERNATIONAL  TRADE 


RICARDO:  ON  FOREIGN  TRADE^ 

NO  EXTENSION  of  foreign  trade  will  immediately  increase  the 
amount  of  value  in  a  country,  although  it  will  very  powerfully 
contribute  to  increase  the  mass  of  commodities,  and  therefore  the  sum 
of  enjoyments.  As  the  value  of  all  foreign  goods  is  measured  by  the 
quantity  of  the  produce  of  our  land  and  labour  which  is  given  in  ex- 
change for  them,  we  should  have  no  greater  value  if,  by  the  discovery 
of  new  markets,  we  obtained  double  the  quantity  of  foreign  goods  in 
exchange  for  a  given  quantity  of  ours.  If  by  the  purchase  of  English 
goods  to  the  amount  of  £1000  a  merchant  can  obtain  a  quantity  of  for- 
eign goods,  which  he  can  sell  in  the  English  market  for  £1200,  he  will 
obtain  20  per  cent,  profit  by  such  an  employment  of  his  capital ;  but 
neither  his  gains,  nor  the  value  of  the  commodities  imported,  will  be 
increased  or  diminished  by  the  greater  or  smaller  quantity  of  foreign 
goods  obtained.  Whether,  for  example,  he  imports  twenty-five  or 
fifty  pipes  of  wine,  his  interest  can  be  no  way  affected  if  at  one  time 
the  twenty-five  pipes,  and  at  another  the  fifty  pipes,  equally  sell  for 
£1200.  In  either  case  his  profit  will  be  limited  to  £200,  or  20  per 
cent,  on  his  capital ;  and  in  either  case  the  same  value  will  be  im- 
ported into  England.  If  the  fifty  pipes  sold  for  more  than  £1200,  the 
profits  of  this  individual  merchant  would  exceed  the  general  rate  of 
profits,  and  capital  would  naturally  flow  into  this  advantageous 
trade,  till  the  fall  of  the  price  of  wine  had  brought  everything  to  the 
former  level. 

It  has  indeed  been  contended  that  the  great  profits  which  are 
sometimes  made  by  particular  merchants  in  foreign  trade  will  elevate 

1  David  Ricardo   (1772-1823),   Principles  of  Political  Economy  and  Taxa- 
tion (181 7),  chap.  vii. 

3 


4  RICARDO 

the  general  rate  of  profits  in  the  country,  and  that  the  abstraction 
of  capital  from  other  employments,  to  partake  of  the  new  and  bene- 
ficial foreign  commerce,  will  raise  prices  generally,  and  thereby  in- 
crease profits.  It  has  been  said,  by  high  authority,  that  less  capital 
being  necessarily  devoted  to  the  growth  of  corn,  to  the  manufacture 
of  cloth,  hats,  shoes,  etc.,  while  the  demand  continues  the  same,  the 
price  of  these  commodities  will  be  so  increased,  that  the  farmer, 
hatter,  clothier,  and  shoemaker  will  have  an  increase  of  profits  as  well 
as  the  foreign  merchant.^ 

They  who  hold  this  argument  agree  with  me  that  the  profits  of 
different  employments  have  a  tendency  to  conform  to  one  another; 
to  advance  and  recede  together.  Our  variance  consists  in  this  :  They 
contend  that  the  equality  of  profits  will  be  brought  about  by  the 
general  rise  of  profits ;  and  I  am  of  opinion  that  the  profits  of  the 
favoured  trade  will  speedily  subside  to  the  general  level. 

For,  first,  I  deny  that  less  capital  will  necessarily  be  devoted  to 
the  growth  of  corn,  to  the  manufacture  of  cloth,  hats,  shoes,  etc., 
unless  the  demand  for  these  commodities  be  diminished ;  and  if  so, 
their  price  will  not  rise.  In  the  purchase  of  foreign  commodities, 
either  the  same,  a  larger,  or  a  less  portion  of  the  produce  of  the  land 
and  labour  of  England  will  be  employed.  If  the  same  portion  be  so 
employed,  then  will  the  same  demand  exist  for  cloth,  shoes,  corn,  and 
hats  as  before,  and  the  same  portion  of  capital  will  be  devoted  to 
their  production.  If,  in  consequence  of  the  price  of  foreign  commod- 
ities being  cheaper,  a  less  portion  of  the  annual  produce  of  the  land 
and  labour  of  England  is  employed  in  the  purchase  of  foreign  com- 
modities, more  will  remain  for  the  purchase  of  other  things.  If  there 
be  a  greater  demand  for  hats,  shoes,  corn,  etc.,  than  before,  which 
there  may  be,  the  consumers  of  foreign  commodities  having  an  addi- 
tional portion  of  their  revenue  disposable,  the  capital  is  also  dispos- 
able with  which  the  greater  value  of  foreign  commodities  was  before 
purchased ;  so  that  with  the  increased  demand  for  corn,  shoes,  etc., 
there  exists  also  the  means  of  procuring  an  increased  supply,  and 
therefore  neither  prices  nor  profits  can  permanently  rise.  If  more  of 
the  produce  of  the  land  and  labour  of  England  be  employed  in  the 
purchase  of  foreign  commodities,  less  can  be  employed  in  the  purchase 
of  other  things,  and  therefore  fewer  hats,  shoes,  etc.,  will  be  required. 

^See  Adam  Smith,  Bk.  I,  chap.  ix. 


ON  FOREIGN  TRADE  S 

At  the  same  time  that  capital  is  liberated  from  the  production  of 
shoes,  hats,  etc.,  more  must  be  employed  in  manufacturing  those  com- 
modities with  which  foreign  commodities  are  purchased ;  and,  con- 
sequently, in  all  cases  the  demand  for  foreign  and  home  commodities 
together,  as  far  as  regards  value,  is  limited  by  the  revenue  and  capital 
of  the  country.  If  one  increases  the  other  must  diminish.  If  the 
quantity  of  wine  imported  in  exchange  for  the  same  quantity  of 
English  commodities  be  doubled,  the  people  of  England  can  either 
consume  double  the  quantity  of  wine  that  they  did  before,  or  the 
same  quantity  of  wine  and  a  greater  quantity  of  English  commodities. 
If  my  revenue  had  been  £1000  with  which  I  purchased  annually  one 
pipe  of  wine  for  £100,  and  a  certain  quantity  of  English  commodities 
for  £900 ;  when  wine  fell  to  £50  per  pipe,  I  might  lay  out  the 
£50  saved,  either  in  the  purchase  of  an  additional  pipe  of  wine  or  in 
the  purchase  of  more  English  commodities.  If  I  bought  more  wine, 
and  every  wine-drinker  did  the  same,  the  foreign  trade  would  not  be  in 
the  least  disturbed ;  the  same  quantity  of  English  commodities  would 
be  exported  in  exchange  for  wine,  and  we  should  receive  double  the 
quantity,  though  not  double  the  value  of  wine.  But  if  I,  and  others, 
contented  ourselves  with  the  same  quantity  of  wine  as  before,  fewer 
English  commodities  would  be  exported,  and  the  wine-drinkers  might 
either  consume  the  commodities  which  were  before  exported,  or  any 
others  for  which  they  had  an  inclination.  The  capital  required  for 
their  production  would  be  supplied  by  the  capital  liberated  from  the 
foreign  trade. 

There  are  two  ways  in  which  capital  may  be  accumulated  ;  it  may 
be  saved  either  in  consequence  of  increased  revenue  or  of  diminished 
consumption.  If  my  profits  are  raised  from  £1000  to  £1200,  while 
my  expenditure  continues  the  same,  I  accumulate  annually  £200  more 
than  I  did  before.  If  I  save  £200  out  of  my  expenditure,  while  my 
profits  continue  the  same,  the  same  effect  will  be  produced  ;  £200  per 
annum  will  be  added  to  my  capital.  The  merchant  who  imported 
wine  after  profits  had  been  raised  from  20  per  cent,  to  40  per  cent., 
instead  of  purchasing  his  English  goods  for  £1000,  must  purchase 
them  for  £857  2s.  lod.,  still  selling  the  wine  which  he  imports  in  return 
for  those  goods  for  £1200  ;  or,  if  he  continued  to  purchase  his  English 
goods  for  £1000,  must  raise  the  price  of  his  wine  to  £1400  ;  he  would 
thus  obtain  40  instead  of  20  per  cent,  profit  on  his  capital ;  but  if, 


6  RICARDO 

in  consequence  of  the  cheapness  of  alt  the  commodities  on  which  his 
revenue  was  expended,  he  and  all  other  consumers  could  save  the 
value  of  £200  out  of  every  £1000  they  before  expended,  they  would 
more  effectually  add  to  the  real  wealth  of  the  country ;  in  one  case, 
the  savings  would  be  made  in  consequence  of  an  increase  of  revenue, 
in  the  other,  in  consequence  of  diminished  expenditure. 

If,  by  the  introduction  of  machinery,  the  generality  of  the  com- 
modities on  which  revenue  was  expended  fell  20  per  cent,  in  value, 
I  should  be  enabled  to  save  as  effectually  as  if  my  revenue  had  been 
raised  20  per  cent.;  but  in  one  case  the  rate  of  profits  is  stationary, 
in  the  other  it  is  raised  20  per  cent. — If,  by  the  introduction  of  cheap 
foreign  goods,  I  can  save  20  per  cent,  from  my  expenditure,  the  effect 
will  be  precisely  the  same  as  if  machinery  had  lowered  the  expense 
of  their  production,  but  profits  would  not  be  raised. 

It  is  not,  therefore,  in  consequence  of  the  extension  of  the  market 
that  the  rate  of  profit  is  raised,  although  such  ex,tension  may  be 
equally  efficacious  in  increasing  the  mass  of  commodities,  and  may 
thereby  enable  us  to  augment  the  funds  destined  for  the  maintenance 
of  labour,  and  the  materials  on  which  labour  may  be  employed.  It  is 
quite  as  important  to  the  happiness  of  mankind  that  our  enjoyments 
should  be  increased  by  the  better  distribution  of  labour,  by  each 
country  producing  those  commodities  for  which  by  its  situation,  its 
climate,  and  its  other  natural  or  artificial  advantages  it  is  adapted, 
and  by  their  exchanging  them  for  the  commodities  of  other  countries, 
as  that  they  should  be  augmented  by  a  rise  in  the  rate  of  profits. 

It  has  been  my  endeavour  to  show  throughout  this  work  that  the 
rate  of  profits  can  never  be  increased  but  by  a  fall  in  wages,  and  that 
there  can  be  no  permanent  fall  of  wages  but  in  consequence  of  a  fall 
of  the  necessaries  on  which  wages  are  expended.  If,  therefore,  by 
the  extension  of  foreign  trade,  or  by  improvements  in  machinery,  the 
food  and  necessaries  of  the  labourer  can  be  brought  to  market,  at 
a  reduced  price,  profits  will  rise.  If,  instead  of  growing  our  own  corn, 
or  manufacturing  the  clothing  and  other  necessaries  of  the  labourer, 
we  discover  a  new  market  from  which  we  can  supply  ourselves  with 
these  commodities  at  a  cheaper  price,  wages  will  fall  and  profits  rise ; 
but  if  the  commodities  obtained  at  a  cheaper  rate,  by  the  extension 
of  foreign  commerce,  or  by  the  improvement  of  machinery,  be  exclu- 
sively the  commodities  consumed  by  the  rich,  no  alteration  will  take 


ON  FOREIGN  TRADE  7 

place  in  the  rate  of  profits.  The  rate  of  wages  would  not  be  affected, 
although  wine,  velvets,  silks,  and  other  expensive  commodities  should 
fall  50  per  cent.,  and  consequently  profits  would  continue  unaltered. 

Foreign  trade,  then,  though  highly  beneficial  to  a  country,  as  it 
increases  the  amount  and  variety  of  the  objects  on  which  revenue 
may  be  expended,  and  affords,  by  the  abundance  and  cheapness  of 
commodities,  incentives  to  saving,  and  to  the  accumulation  of  capital, 
has  no  tendency  to  raise  the  profits  of  stock  unless  the  commodities 
imported  be  of  that  description  on  which  the  wages  of  labour  are 
expended. 

The  remarks  which  have  been  made  respecting  foreign  trade  apply 
equally  to  home  trade.  The  rate  of  profits  is  never  increased  by  a 
better  distribution  of  labour,  by  the  invention  of  machinery,  by  the 
establishment  of  roads  and  canals,  or  by  any  means  of  abridging 
labour  either  in  the  manufacture  or  in  the  conveyance  of  goods. 
These  are  causes  which  operate  on  price,  and  never  fail  to  be  highly 
beneficial  to  consumers ;  since  they  enable  them,  with  the  same 
labour,  or  with  the  value  of  the  produce  of  the  same  labour,  to 
obtain  in  exchange  a  greater  quantity  of  the  commodity  to  which 
the  improvement  is  applied  ;  but  they  have  no  effect  whatever  on 
profit.  On  the  other  hand,  every  diminution  in  the  wages  of  labour 
raises  profits,  but  produces  no  effect  on  the  price  of  commodities. 
One  is  advantageous  to  all  classes,  for  all  classes  are  consumers ;  the 
other  is  beneficial  only  to  producers ;  they  gain  more,  but  everything 
remains  at  its  former  price.  In  the  first  case  they  get  the  same  as 
before ;  but  everything  on  which  their  gains  are  expended  is 
diminished  in  exchangeable  value. 

The  same  rule  which  regulates  the  relative  value  of  commodities 
in  one  country  does  not  regulate  the  relative  value  of  the  commodities 
exchanged  between  two  or  more  countries. 

Under  a  system  of  perfectly  free  commerce,  each  country  naturally 
devotes  its  capital  and  labour  to  such  employments  as  are  most 
beneficial  to  each.  This  pursuit  of  individual  advantage  is  admirably 
connected  with  the  universal  good  of  the  whole.  By  stimulating  in- 
dustry, by  rewarding  ingenuity,  and  by  using  most  efficaciously  the 
peculiar  powers  bestowed  by  nature,  it  distributes  labour  most 
effectively  and  most  economically :  while,  by  increasing  the  general 
mass  of  productions,  it  diffuses  general  benefit,  and  binds  together, 


8  RICARDO 

by  one  common  tie  of  interest  and  intercourse,  the  universal  society 
of  nations  throughout  the  civilised  world.  It  is  this  principle  which 
determines  that  wine  shall  be  made  in  France  and  Portugal,  that 
corn  shall  be  grown  in  America  and  Poland,  and  that  hardware  and 
other  goods  shall  be  manufactured  in  England. 

In  one  and  the  same  country,  profits  are,  generally  speaking,  always 
on  the  same  level ;  or  differ  only  as  the  employment  of  capital  may 
be  more  or  less  secure  and  agreeable.  It  is  not  so  between  different 
countries.  If  the  profits  of  capital  employed  in  Yorkshire  should 
exceed  those  of  capital  employed  in  London,  capital  would  speedily 
move  from  London  to  Yorkshire,  and  an  equality  of  profits  would  be 
effected  ;  but  if  in  consequence  of  the  diminished  rate  of  production  in 
the  lands  of  England,  from  the  increase  of  capital  and  population, 
wages  should  rise  and  profits  fall,  it  would  not  follow  that  capital 
and  population  would  necessarily  move  from  England  to  Holland,  or 
Spain,  or  Russia,  where  profits  might  be  higher. 

If  Portugal  had  no  commercial  connection  with  other  countries,  in- 
stead of  employing  a  great  part  of  her  capital  and  industry  in  the  pro- 
duction of  wines,  with  which  she  purchases  for  her  own  use  the  cloth 
and  hardware  of  other  countries,  she  would  be  obliged  to  devote  a 
part  of  that  capital  to  the  manufacture  of  those  commodities,  which 
she  would  thus  obtain  probably  inferior  in  quality  as  well  as  quantity. 

The  quantity  of  wine  which  she  shall  give  in  exchange  for  the  cloth 
of  England  is  not  determined  by  the  respective  quantities  of  labour 
devoted  to  the  production  of  each,  as  it  would  be  if  both  commodities 
were  manufactured  in  England,  or  both  in  Portugal. 

England  may  be  so  circumstanced  that  to  produce  the  cloth  may 
require  the  labour  of  loo  men  for  one  year ;  and  if  she  attempted  to 
make  the  wine,  it  might  require  the  labour  of  120  men  for  the  same 
time.  England  would  therefore  find  it  her  interest  to  import  wine, 
and  to  purchase  it  by  the  exportation  of  cloth. 

To  produce  the  wine  in  Portugal  might  require  only  the  labour  of 
80  men  for  one  year,  and  to  produce  the  cloth  in  the  same  country 
might  require  the  labour  of  90  men  for  the  same  time.  It  would 
therefore  be  advantageous  for  her  to  export  wine  in  exchange  for 
cloth.  This  exchange  might  even  take  place  notwithstanding  that  the 
commodity  imported  by  Portugal  could  be  produced  there  with  less 
labour  than  in  England.    Though  she  could  make  the  cloth  with  the 


ON  FOREIGN  TRADE  9 

labour  of  90  men,  she  would  import  it  from  a  country  where  it  required 
the  labour  of  100  men  to  produce  it,  because  it  would  be  advantageous 
to  her  rather  to  employ  her  capital  in  the  production  of  wine,  for 
which  she  would  obtain  more  cloth  from  England,  than  she  could 
produce  by  diverting  a  portion  of  her  capital  from  the  cultivation  of 
vines  to  the  manufacture  of  cloth. 

Thus  England  would  give  the  produce  of  the  labour  of  100  men 
for  the  produce  of  the  labour  of  80.  Such  an  exchange  could  not 
take  place  between  the  individuals  of  the  same  country.  The  labour 
of  100  Englishmen  cannot  be  given  for  that  of  80  Englishmen,  but 
the  produce  of  the  labour  of  100  Englishmen  may  be  given  for  the 
produce  of  the  labour  of  80  Portuguese,  60  Russians,  or  120  East 
Indians.  The  difference  in  this  respect,  between  a  single  country  and 
many,  is  easily  accounted  for,  by  considering  the  difficulty  with  which 
capital  moves  from  one  country  to  another,  to  seek  a  more  profit- 
able employment,  and  the  activity  with  which  it  invariably  passes 
from  one  province  to  another  in  the  same  country.^ 

It  would  undoubtedly  be  advantageous  to  the  capitalists  of  Eng- 
land, and  to  the  consumers  in  both  countries,  that  under  such  circum- 
stances the  wine  and  the  cloth  should  both  be  made  in  Portugal,  and 
therefore  that  the  capital  and  labour  of  England  employed  in  making 
cloth  should  be  removed  to  Portugal  for  that  purpose.  In  that  case, 
the  relative  value  of  these  commodities  would  be  regulated  by  the 
same  principle  as  if  one  were  the  produce  of  Yorkshire  and  the  other 
of  London :  and  in  every  other  case,  if  capital  freely  flowed  towards 
those  countries  where  it  could  be  most  profitably  employed,  there 
could  be  no  difference  in  the  rate  of  profit,  and  no  other  difference 
in  the  real  or  labour  price  of  commodities  than  the  additional  quantity 


^It  will  appear,  then,  that  a  country  possessing  very  considerable  advantages 
in  machinery  and  skill,  and  which  may  therefore  be  enabled  to  manufacture 
commodities  with  much  less  labour  than  her  neighbours,  may,  in  return  for 
such  commodities,  import  a  portion  of  the  corn  required  for  its  consumption, 
even  if  its  land  were  more  fertile  and  corn  could  be  grown  with  less  labour 
than  in  the  country  from  which  it  was  imported.  Two  men  can  both  make 
shoes  and  hats,  and  one  is  superior  to  the  other  in  both  employments;  but  in 
making  hats  he  can  only  exceed  his  competitor  by  one-fifth  or  20  per  cent., 
and  in  making  shoes  he  can  excel  him  by  one-third  or  33  per  cent.; — will  it 
not  be  for  the  interest  of  both  that  the  superior  man  should  employ  himself 
exclusively  in  making  shoes,  and  the  inferior  man  in  making  hats? 


10  RICARDO 

of  labour  required  to  convey  them  to  the  various  markets  where  they 
were  to  be  sold. 

Experience,  however,  shows  that  the  fancied  or  real  insecurity  of 
capital,  when  not  under  the  immediate  control  of  its  owner,  together 
with  the  natural  disinclination  which  every  man  has  to  quit  the 
country  of  his  birth  and  connections,  and  intrust  himself,  with  all  his 
habits  fixed,  to  a  strange  government  and  new  laws,  check  the  emi- 
gration of  capital.  These  feelings,  which  I  should  be  sorry  to  see 
weakened,  induce  most  men  of  property  to  be  satisfied  with  a  low 
rate  of  profits  in  their  own  country,  rather  than  seek  a  more  advan- 
tageous employment  for  their  wealth  in  foreign  nations. 

Gold  and  silver  having  been  chosen  for  the  general  medium  of 
circulation,  they  are,  by  the  competition  of  commerce,  distributed 
in  such  proportions  amongst  the  different  countries  of  the  world  as 
to  accommodate  themselves  to  the  natural  traffic  which  would  take 
place  if  no  such  metals  existed,  and  the  trade  between  countries 
were  purely  a  trade  of  barter. 

Thus,  cloth  cannot  be  imported  into  Portugal  unless  it  sell  there 
for  more  gold  than  it  cost  in  the  country  from  which  it  was  imported  ; 
and  wine  cannot  be  imported  into  England  unless  it  will  sell  for  more 
there  than  it  cost  in  Portugal.  If  the  trade  were  purely  a  trade  of 
barter,  it  could  only  continue  whilst  England  could  make  cloth  so 
cheap  as  to  obtain  a  greater  quantity  of  wine  with  a  given  quantity 
of  labour  by  manufacturing  cloth  than  by  growing  vines ;  and  also 
whilst  the  industry  of  Portugal  were  attended  by  the  reverse  effects. 
Now  suppose  England  to  discover  a  process  for  making  wine,  so  that 
it  should  become  her  interest  rather  to  grow  it  than  import  it ;  she 
would  naturally  divert  a  portion  of  her  capital  from  the  foreign  trade 
to  the  home  trade ;  she  would  cease  to  manufacture  cloth  for  exporta- 
tion, and  would  grow  wine  for  herself.  The  money  price  of  these 
commodities  would  be  regulated  accordingly ;  wine  would  fall  here 
while  cloth  continued  at  its  former  price,  and  in  Portugal  no  alteration 
would  take  place  in  the  price  of  either  commodity.  Cloth  would 
continue  for  some  time  to  be  exported  from  this  country,  because  its 
price  would  continue  to  be  higher  in  Portugal  than  here ;  but  money 
instead  of  wine  would  be  given  in  exchange  for  it,  till  the  accumu- 
lation of  money  here,  and  its  diminution  abroad,  should  so  operate 
on  the  relative  value  of  cloth  in  the  two  countries  that  it  would  cease 


ON  FOREIGN  TRADE  ii 

to  be  profitable  to  export  it.  If  the  improvement  in  making  wine  were 
of  a  very  important  description,  it  might  become  profitable  for  the 
two  countries  to  exchange  employments ;  for  England  to  make  all 
the  wine,  and  Portugal  all  the  cloth  consumed  by  them ;  but  this 
could  be  effected  only  by  a  new  distribution  of  the  precious  metals, 
which  should  raise  the  price  of  cloth  in  England  and  lower  it  in 
Portugal.  The  relative  price  of  wine  would  fall  in  England  in  conse- 
quence of  the  real  advantage  from  the  improvement  of  its  manufac- 
ture ;  that  is  to  say,  its  natural  price  would  fall ;  the  relative  price 
of  cloth  would  rise  there  from  the  accumulation  of  money. 

Thus,  suppose  before  the  improvement  in  making  wine  in  England 
the  price  of  wine  here  v/ere  £50  per  pipe,  and  the  price  of  a  certain 
quantity  of  cloth  were  £45,  whilst  in  Portugal  the  price  of  the  same 
quantity  of  wine  was  £45,  and  that  of  the  same  quantity  of  cloth  £50  ; 
wine  would  be  exported  from  Portugal  with  a  profit  of  £5,  and  cloth 
from  England  with  a  profit  of  the  same  amount. 

Suppose  that,  after  the  improvement,  wine  falls  to  £45  in  England, 
the  cloth  continuing  at  the  same  price.  Every  transaction  in  com- 
merce is  an  independent  transaction.  Whilst  a  merchant  can  buy 
cloth  in  England  for  £45,  and  sell  it  with  the  usual  profit  in  Portugal, 
he  will  continue  to  export  it  from  England.  His  business  is  simply  to 
purchase  English  cloth,  and  to  pay  for  it  by  a  bill  of  exchange,  which 
he  purchases  with  Portuguese  money.  It  is  to  him  of  no  importance 
what  becomes  of  this  money :  he  has  discharged  his  debt  by  the 
rem.ittance  of  the  bill.  His  transaction  is  undoubtedly  regulated  by 
the  terms  on  which  he  can  obtain  this  bill,  but  they  are  known  to 
him  at  the  time;  and  the  causes  which  may  influence  the  market 
price  of  bills,  or  the  rate  of  exchange,  is  no  consideration  of  his. 

If  the  markets  be  favourable  for  the  exportation  of  wine  from 
Portugal  to  England,  the  exporter  of  the  wine  will  be  a  seller  of  a 
bill,  which  will  be  purchased  either  by  the  importer  of  the  cloth,  or 
by  the  person  who  sold  him  his  bill ;  and  thus,  without  the  necessity 
of  money  passing  from  either  country,  the  exporters  in  each  country 
will  be  paid  for  their  goods.  Without  having  any  direct  transaction 
with  each  other,  the  money  paid  in  Portugal  by  the  importer  of  cloth 
will  be  paid  to  the  Portuguese  exporter  of  wine ;  and  in  England  by 
the  negotiation  of  the  same  bill  the  exporter  of  the  cloth  will  be 
authorised  to  receive  its  value  from  the  importer  of  wine. 


12  RICARDO 

But  if  the  prices  of  wine  were  such  that  no  wine  could  be  exported 
to  England,  the  importer  of  cloth  would  equally  purchase  a  bill ;  but 
the  price  of  that  bill  would  be  higher,  from  the  knowledge  which  the 
seller  of  it  would  possess  that  there  was  no  counter  bill  in  the 
market  by  which  he  could  ultimately  settle  the  transactions  between 
the  two  countries ;  he  might  know  that  the  gold  or  silver  money 
which  he  received  in  exchange  for  his  bill  must  be  actually  exported 
to  his  correspondent  in  England,  to  enable  him  to  pay  the  demand 
which  he  had  authorised  to  be  made  upon  him,  and  he  might  there- 
fore charge  in  the  price  of  his  bill  all  the  expenses  to  be  incurred, 
together  with  his  fair  and  usual  profit. 

If  then  this  premium  for  a  bill  on  England  should  be  equal  to  the 
profit  on  importing  cloth,  the  importation  would  of  course  cease ;  but 
if  the  premium  on  the  bill  were  only  2  per  cent.,  if  to  be'  enabled 
to  pay  a  debt  in  England  of  £100,  £102  should  be  paid  in  Portugal, 
whilst  cloth  which  cost  £45  would  sell  for  £50,  cloth  would  be 
imported,  bills  would  be  bought,  and  money  would  be  exported,  till 
the  diminution  of  money  in  Portugal,  and  its  accumulation  in  Eng- 
land, had  produced  such  a  state  of  prices  as  would  make  it  no  longer 
profitable  to  continue  these  transactions. 

But  the  diminution  of  money  in  one  country,  and  its  increase  in 
another,  do  not  operate  on  the  price  of  one  commodity  only,  but  on 
the  prices  of  all,  and  therefore  the  price  of  wine  and  cloth  will  be 
both  raised  in  England  and  both  lowered  in  Portugal.  The  price  of 
cloth,  from  being  £45  in  one  country  and  £50  in  the  other,  would 
probably  fall  to  £49  or  £48  in  Portugal,  and  rise  to  £46  or  £47  in 
England,  and  not  afford  a  sufficient  profit  after  paying  a  premium 
for  a  bill  to  induce  any  merchant  to  import  that  commodity. 

It  is  thus  that  the  money  of  each  country  is  apportioned  to  it  in 
such  quantities  only  as  may  be  necessary  to  regulate  a  profitable  trade 
of  barter.  England  exported  cloth  in  exchange  for  wine  because, 
by  so  doing,  her  industry  was  rendered  more  productive  to  her ;  she 
had  more  cloth  and  wine  than  if  she  had  manufactured  both  for 
herself ;  and  Portugal  imported  cloth  and  exported  wine  because  the 
industry  of  Portugal  could  be  more  beneficially  employed  for  both 
countries  in  producing  wine.  Let  there  be  more  difficulty  in  Eng- 
land in  producing  cloth,  or  in  Portugal  in  producing  wine,  or  let  there 


ON  FOREIGN  TRADE  13 

be  more  facility  in  England  in  producing  wine,  or  in  Portugal  in 
producing  cloth,  and  the  trade  must  immediately  cease. 

No  change  whatever  takes  place  in  the  circumstances  of  Portugal ; 
but  England  finds  that  she  can  employ  her  labour  more  productively 
in  the  manufacture  of  wine,  and  instantly  the  trade  of  barter  between 
the  two  countries  changes.  Not  only  is  the  exportation  of  wine  from 
Portugal  stopped,  but  a  new  distribution  of  the  precious  metals  takes 
place,  and  her  importation  of  cloth  is  also  prevented. 

Both  countries  would  probably  find  it  their  interest  to  make  their 
own  wine  and  their  own  cloth ;  but  this  singular  result  would  take 
place :  in  England,  though  wine  would  be  cheaper,  cloth  would  be 
elevated  in  price,  more  would  be  paid  for  it  by  the  consumer ;  while 
in  Portugal  the  consumers,  both  of  cloth  and  of  wine,  would  be 
able  to  purchase  those  commodities  cheaper.  In  the  country  where 
the  improvement  was  made  prices  would  be  enhanced ;  in  that  where 
no  change  had  taken  place,  but  where  they  had  been  deprived  of  a 
profitable  branch  of  foreign  trade,  prices  would  fall. 

This,  however,  is  only  a  seeming  advantage  to  Portugal,  for  the 
quantity  of  cloth  and  wine  together  produced  in  that  country  would 
be  diminished,  while  the  quantity  produced  in  England  would  be 
increased.  Money  would  in  some  degree  have  changed  its  value  in 
the  two  countries ;  it  would  be  lowered  in  England  and  raised  in 
Portugal.  Estimated  in  money,  the  whole  revenue  of  Portugal  would 
be  diminished ;  estimated  in  the  same  medium  the  whole  revenue  of 
England  would  be  increased. 

Thus,  then,  it  appears  that  the  improvement  of  a  manufacture  in 
any  country  tends  to  alter  the  distribution  of  the  precious  metals 
amongst  the  nations  of  the  world :  it  tends  to  increase  the  quantity 
of  commodities,  at  the  same  time  that  it  raises  general  prices  in  the 
country  where  the  improvement  takes  place. 

To  simplify  the  question,  I  have  been  supposing  the  trade  between 
two  countries  to  be  confined  to  two  commodities — to  wine  and 
cloth ;  but  it  is  well  known  that  many  and  various  articles  enter  into 
the  list  of  exports  and  imports.  By  the  abstraction  of  money  from 
one  country,  and  the  accumulation  of  it  in  another,  all  commodities 
are  affected  in  price,  and  consequently  encouragement  is  given  to  the 
exportation  of  many  more  commodities  besides  money,  which  will 


14  RICARDO 

therefore  prevent  so  great  an  effect  from  taking  place  on  the  value  of 
money  in  the  two  countries  as  might  otherwise  be  expected. 

Beside  the  improvements  in  arts  and  machinery,  there  are  various 
other  causes  which  are  constantly  operating  on  the  natural  course 
of  trade,  and  which  interfere  with  the  equilibrium  and  the  relative 
value  of  money.  Bounties  on  exportation  or  importation,  new  taxes 
on  commodities,  sometimes  by  their  direct,  and  at  other  times  by 
their  indirect  operation,  disturb  the  natural  trade  of  barter,  and 
produce  a  consequent  necessity  of  importing  or  exporting  money,  in 
order  that  prices  may  be  accommodated  to  the  natural  course  of  com- 
merce ;  and  this  effect  is  produced  not  only  in  the  country  where 
the  disturbing  cause  takes  place,  but,  in  a  greater  or  less  degree,  in 
every  country  of  the  commercial  world. 

This  will  in  some  measure  account  for  the  different  value  of  money 
in  different  countries ;  it  will  explain  to  us  why  the  prices  of  home 
commodities,  and  those  of  great  bulk,  though  of  comparatively 
small  value,  are,  independently  of  other  causes,  higher  in  those  coun- 
tries where  manufactures  flourish.  Of  two  countries  having  precisely 
the  same  population,  and  the  same  quantity  of  land  of  equal  fertility 
in  cultivation,  with  the  same  knowledge  too  of  agriculture,  the 
prices  of  raw  produce  will  be  highest  in  that  where  the  greater  skill 
and  the  better  machinery  is  used  in  the  manufacture  of  exportable 
commodities.  The  rate  of  profits  will  probably  differ  but  little ;  for 
wages,  or  the  real  reward  of  the  labourer,  may  be  the  same  in  both ; 
but  those  wages,  as  well  as  raw  produce,  will  be  rated  higher  in  money 
in  that  country,  into  which,  from  the  advantages  attending  their 
skill  and  machinery,  an  abundance  of  money  is  imported  in  exchange 
for  their  goods. 

Of  these  two  countries,  if  one  had  the  advantage  in  the  manu- 
facture of  goods  of  one  quality,  and  the  other  in  the  manufacture 
of  goods  of  another  quality,  there  would  be  no  decided  infl\ix  of  the 
precious  metals  into  either ;  but  if  the  advantage  very  heavily  pre- 
jjonderated  in  favour  of  either,  that  effect  would  be  inevitable. 

In  the  former  part  of  this  work,  we  have  assumed,  for  the  purpose 
of  argument,  that  money  always  continued  of  the  same  value ;  we 
are  now  endeavouring  to  show  that,  besides  the  ordinary  variations 
in  the  value  of  money,  and  those  which  are  common  to  the  whole 
commercial  world,  there  are  also  partial  variations  to  which  money  is 


ON  FOREIGN  TRADE  15 

subject  in  particular  countries ;  and  to  the  fact  that  the  value  of 
money  is  never  the  same  in  any  two  countries,  depending  as  it  does 
on  relative  taxation,  on  manufacturing  skill,  on  the  advantages  of 
climate,  natural  productions,  and  many  other  causes. 

Although,  however,  money  is  subject  to  such  perpetual  variations, 
and  consequently  the  prices  of  the  commodities  which  are  common 
to  most  countries  are  also  subject  to  considerable  difference,  yet  no 
effect  will  be  produced  on  the  rate  of  profits,  either  from  the  influx 
or  efflux  of  money.  Capital  will  not  be  increased  because  the  circu- 
lating medium  is  augmented.  If  the  rent  paid  by  the  farmer  to  his 
landlord,  and  the  wages  to  his  labourers,  be  20  per  cent,  higher  in 
one  country  than  another,  and  if  at  the  same  time  the  nominal  value 
of.  the  farmer's  capital  be  20  per  cent,  more,  he  will  receive  precisely 
the  same  rate  of  profits,  although  he  should  sell  his  raw  produce 
20  per  cent,  higher. 

Profits,  it  cannot  be  too  often  repeated,  depend  on  wages ;  not  on 
nominal,  but  real  wages  ;  not  on  the  number  of  pounds  that  may  be 
annually  paid  to  the  labourer,  but  on  the  number  of  days'  work 
necessary  to  obtain  those  pounds.  Wages  may  therefore  be  precisely 
the  same  in  two  countries ;  they  may  bear,  too,  the  same  proportion 
to  rent,  and  to  the  whole  produce  obtained  from  the  land,  although 
in  one  of  those  countries  the  labourer  should  receive  ten  shillings 
per  week  and  in  the  other  twelve. 

In  the  early  states  of  society,  when  manufactures  have  made  little 
progress,  and  the  produce  of  all  countries  is  nearly  similar,  consisting 
of  the  bulky  and  most  useful  commodities,  the  value  of  money  in 
different  countries  will  be  chiefly  regulated  by  their  distance  from 
the  mines  which  supply  the  precious  metals;  but  as  the  arts  and 
improvements  of  society  advance,  and  different  nations  excel  in 
particular  manufactures,  although  distance  will  still  enter  into  the 
calculation,  the  value  of  the  precious  metals  will  be  chiefly  regulated 
by  the  superiority  of  those  manufactures. 

Suppose  all  nations  to  produce  corn,  cattle,  and  coarse  clothing 
only,  and  that  it  was  by  the  exportation  of  such  commodities  that 
gold  could  be  obtained  from  the  countries  which  produced  them,  or 
from  those  who  held  them  in  subjection ;  gold  would  naturally  be  of 
greater  exchangeable  value  in  Poland  than  in  England,  on  account 
of  the  greater  expense  of  sending  such  a  bulky  commodity  as  corn 


1 6  RICARDO 

the  more  distant  voyage,  and  also  the  greater  expense  attending  the 
conveying  of  gold  to  Poland. 

This  difference  in  the  value  of  gold,  or,  which  is  the  same  thing, 
this  difference  in  the  price  of  corn  in  the  two  countries,  would  exist, 
although  the  facilities  of  producing  corn  in  England  should  far 
exceed  those  of  Poland,  from  the  greater  fertility  of  the  land  and 
the  superiority  in  the  skill  and  implements  of  the  labourer. 

If,  however,  Poland  should  be  the  first  to  improve  her  manu- 
factures, if  she  should  succeed  in  making  a  commodity  which  was 
generally  desirable,  including  great  value  in  little  bulk,  or  if  she 
should  be  exclusively  blessed  with  some  natural  production,  generally 
desirable,  and  not  possessed  by  other  countries,  she  would  obtain 
an  additional  quantity  of  gold  in  exchange  for  this  commodity,  which 
would  operate  on  the  price  of  her  corn,  cattle,  and  coarse  clothing. 
The  disadvantage  of  distance  would  probably  be  more  than  compen- 
sated by  the  advantage  of  having  an  exportable  commodity  of  great 
value,  and  money  would  be  permanently  of  lower  value  in  Poland 
than  in  England.  If,  on  the  contrary,  the  advantage  of  skill  and 
machinery  were  possessed  by  England,  another  reason  would  be 
added  to  that  which  before  existed  why  gold  should  be  less  valuable 
in  England  than  in  Poland,  and  why  corn,  cattle,  and  clothing  should 
be  at  a  higher  price  in  the  former  country. 

These  1  believe  to  be  the  only  two  causes  which  regulate  the 
comparative  value  of  money  in  the  different  countries  of  the  world ; 
for  although  taxation  occasions  a  disturbance  of  the  equilibrium  of 
money,  it  does  so  by  depriving  the  country  in  which  it  is  imposed  of 
some  of  the  advantages  attending  skill,  industry,  and  climate. 
*********** 

Any  improvement  in  the  facility  of  working  the  mines,  by  which 
the  precious  metals  may  be  produced  with  a  less  quantity  of  labour, 
will  sink  the  value  of  money  generally.  It  will  then  exchange  for 
fewer  commodities  in  all  countries ;  but  when  any  particular  country 
excels  in  manufactures,  so  as  to  occasion  an  influx  of  money  towards 
it,  the  value  of  money  will  be  lower,  and  the  prices  of  corn  and 
labour  will  be  relatively  higher  in  that  country  than  in  any 
other. 

This  higher  value  of  money  will  not  be  indicated  by  the  exchange ; 
bills  may  continue  to  be  negotiated  at  par,  although  the  prices  of 


ON  FOREIGN  TRADE  17 

corn  and  labour  should  be  10,  20,  or  30  per  cent,  higher  in  one 
country  than  another.  Under  the  circumstances  supposed,  such  a 
difference  of  prices  is  the  natural  order  of  things,  and  the  exchange 
can  only  be  at  par  when  a  sufficient  quantity  of  money  is  intro- 
duced into  the  country  excelling  in  manufactures,  so  as  to  raise  the 
price  of  its  corn  and  labour.  If  foreign  countries  should  prohibit 
the  exportation  of  money,  and  could  successfully  enforce  obedience 
to  such  a  law,  they  might  indeed  prevent  the  rise  in  the  prices  of 
the  corn  and  labour  of  the  manufacturing  country ;  for  such  rise 
can  only  take  place  after  the  influx  of  the  precious  metals,  supposing 
paper  money  not  to  be  used  ;  but  they  could  not  prevent  the  ex- 
change from  being  very  unfavourable  to  them.  If  England  were  the 
manufacturing  country,  and  it  were  possible  to  prevent  the  importa- 
tion of  money,  the  exchange  with  France,  Holland,  and  Spain  might 
be  5,  ID,  or  20  per  cent,  against  those  countries. 

Whenever  the  current  of  money  is  forcibly  stopped,  and  when 
money  is  prevented  from  settling  at  its  just  level,  there  are  no  limits 
to  the  possible  variations  of  the  exchange.  The  effects  are  similar  to 
those  which  follow  when  a  paper  money,  not  exchangeable  for  specie 
at  the  will  of  the  holder,  is  forced  into  circulation.  Such  a  currency 
is  necessarily  confined  to  the  country  where  it  is  issued :  it  cannot, 
when  too  abundant,  diffuse  itself  generally  amongst  other  countries. 
The  level  of  circulation  is  destroyed,  and  the  exchange  will  inevitably 
be  unfavourable  to  the  country  where  it  is  excessive  in  quantity  :  just 
so  would  be  the  effects  of  a  metallic  circulation  if  by  forcible  means, 
by  laws  which  could  not  be  evaded,  money  should  be  detained  in  a 
country,  when  the  stream  of  trade  gave  it  an  impetus  towards  other 
countries. 

When  each  country  has  precisely  the  quantity  of  money  which  it 
ought  to  have,  money  will  not  indeed  be  of  the  same  value  in  each, 
for  with  respect  to  many  commodities  it  may  differ  5,  10,  or  even 
20  per  cent.,  but  the  exchange  will  be  at  par.  One  hundred  pounds 
in  England,  or  the  silver  which  is  in  £100,  will  purchase  a  bill  of  £100, 
or  an  equal  quantity  of  silver  in  France,  Spain,  or  Holland. 

In  speaking  of  the  exchange  and  the  comparative  value  of  money 
in  different  countries,  we  must  not  in  the  least  refer  to  the  value  of 
money  estimated  in  commodities  in  either  country.  The  exchange  is 
never  ascertained  by  estimating  the  comparative  value  of  money  in 


1 8  RICARDO 

corn,  cloth,  or  any  commodity  whatever,  but  by  estimating  the  value 
of  the  currency  of  one  country  in  the  currency  of  another. 

It  may  also  be  ascertained  by  comparing  it  with  some  standard 
common  to  both  countries.  If  a  bill  on  England  for  £ioo  will  pur- 
chase the  same  quantity  of  goods  in  France  or  Spain  that  a  bill  on 
Hamburgh  for  the  same  sum  will  do,  the  exchange  between  Hamburgh 
and  England  is  at  par;  but  if  a  bill  on  England  for  £130  will 
purchase  no  more  than  a  bill  on  Hamburgh  for  £100,  the  exchange 
is  30  per  cent,  against  England. 

*^  M,  ^  ^  A^.  ^  ^  ^  A^  ^ 

-!?•  'Jr  TV  Tt"  TT  -TT  TT  -TV  "tT  'Tt 

Those  who  maintain  that  our  currency  was  depreciated  during 
the  last  ten  years,  when  the  exchange  varied  from  20  to  30  per  cent, 
against  this  country,  have  never  contended,  as  they  have  been  accused 
of  doing,  that  money  could  not  be  more  valuable  in  one  country 
than  another  as  compared  with  various  commodities  ;  but  they  did 
contend  that  £130  could  not  be  detained  in  England  unless  it  was 
depreciated,  when  it  was  of  no  more  value,  estimated  in  the  money  of 
Hamburgh  or  of  Holland,  than  the  bullion  in  £100. 

By  sending  130  good  English  pounds  sterling  to  Hamburgh,  even 
at  an  expense  of  £5,  I  should  be  possessed  there  of  £125  ;  what  then 
could  make  me  consent  to  give  £130  for  a  bill  which  would  give 
me  £100  in  Hamburgh,  but  that  my  pounds  were  not  good  pounds 
sterling?  —  they  were  deteriorated,  were  degraded  in  intrinsic  value 
below  the  pounds  sterling  of  Hamburgh,  and  if  actually  sent  there, 
at  an  expense  of  £5,  would  sell  only  for  £100.  With  metallic  pounds 
sterling,  it  is  not  denied  that  my  £130  would  procure  me  £125  in 
Hamburgh,  but  with  paper  pounds  sterling  I  can  only  obtain  £100; 
and  yet  it  was  maintained  that  £130  in  paper  was  of  equal  value  with 
£130  in  silver  or  gold. 

Some  indeed  more  reasonably  maintained  that  £130  in  paper  was 
not  of  equal  value  with  £130  in  metallic  money ;  but  they  said  that 
it  was  the  metallic  money  which  had  changed  its  value  and  not  the 
paper  money.  They  wished  to  confine  the  meaning  of  the  word 
depreciation  to  an  actual  fall  of  value,  and  not  to  a  comparative 
difference  between  the  value  of  money  and  the  standard  by  which 
by  law  it  is  regulated.  One  hundred  pounds  of  English  money  was 
formerly  of  equal  value  with  and  could  purchase  £100  of  Hamburgh 
money:   in  any  other  country  a  bill  of  £100  on  England,  or  on 


ON    FOREIGN    TRADE  19 

Hamburgh,  could  purchase  precisely  the  same  quantity  of  commodi- 
ties. To  obtain  the  same  things,  I  was  lately  obliged  to  give  £130 
EngHsh  money,  when  Hamburgh  could  obtain  them  for  £100  Ham- 
burgh money.  If  English  money  was  of  the  same  value  then  as  be- 
fore, Hamburgh  money  must  have  risen  in  value.  But  where  is 
the  proof  of  this?  How  is  it  to  be  ascertained  whether  English 
money  has  fallen  or  Hamburgh  money  has  risen  ?  there  is  no  standard 
by  which  this  can  be  determined.  It  is  a  plea  which  admits  of  no 
proof,  and  can  neither  be  positively  affirmed  nor  positively  contra- 
dicted. The  nations  of  the  world  must  have  been  early  convinced 
that  there  was  no  standard  of  value  in  nature  to  which  they  might 
unerringly  refer,  and  therefore  chose  a  medium  which  on  the  whole 
appeared  to  them  less  variable  than  any  other  commodity. 

To  this  standard  we  must  conform  till  the  law  is  changed,  and 
till  some  other  commodity  is  discovered  by  the  use  of  which  we  shall 
obtain  a  more  perfect  standard  than  that  which  vv^e  have  established. 
While  gold  is  exclusively  the  standard  in  this  country  money  will  be 
depreciated  when  a  pound  sterling  is  not  of  equal  value  with  5  dwts. 
and  3  grs.  of  standard  gold,  and  that  whether  gold  rises  or  falls  in 
general  value. 


II 

MILL:  OF  INTERNATIONAL  TRADE^ 

THE  causes  which  occasion  a  commodity  to  be  brought  from  a 
distance,  instead  of  being  produced,  as  convenience  would  seem 
to  dictate,  as  near  as  possible  to  the  market  where  it  is  to  be  sold 
for  consumption,  are  usually  conceived  in  a  rather  superficial  manner. 
Some  things  it  is  physically  impossible  to  produce,  except  in  partic- 
ular circumstances  of  heat,  soil,  water,  or  atmosphere.  But  there  are 
many  things  which,  though  they  could  be  produced  at  home  without 
difficulty,  and  in  any  quantity,  are  yet  imported  from  a  distance. 
The  explanation  which  would  be  popularly  given  of  this  would  be, 
that  it  is  cheaper  to  import  than  to  produce  them :  and  this  is  the 
true  reason.  But  this  reason  itself  requires  that  a  reason  be  given 
for  it.  Of  two  things  produced  in  the  same  place,  if  one  is  cheaper 
than  the  other,  the  reason  is  that  it  can  be  produced  with  less  labour 
and  capital,  or,  in  a  word,  at  less  cost.  Is  this  also  the  reason  as 
between  things  produced  in  different  places?  Are  things  never 
imported  but  from  places  where  they  can  be  produced  with  less 
labour  (or  less  of  the  other  element  of  cost,  time)  than  in  the  place 
to  which  they  are  brought  ?  Does  the  law,  that  permanent  value  is 
proportioned  to  cost  of  production,  hold  good  between  commodities 
produced  in  distant  places,  as  it  does  between  those  produced  in 
adjacent  places  ? 

We  shall  find  that  it  does  not.  A  thing  may  sometimes  be  sold 
cheapest,  by  being  produced  in  some  other  place  than  that  at  which 
it  can  be  produced  with  the  smallest  amount  of  labour  and  absti- 
nence. England  might  import  corn  from  Poland  and  pay  for  it  in 
cloth,  even  though  England  had  a  decided  advantage  over  Poland  in 
the  production  of  both  the  one  and  the  other.  England  might  send 
cottons  to  Portugal  in  exchange  for  wine,  although  Portugal  might 

ijohn  Stuart  Mill  (1806-1873),  Principles  of  Political  Economy  (1848), 
Bk.  Ill,  chap.  xvii. 

20 


OF  INTERNATIONAL  TRADE  21 

be  able  to  produce  cottons  with  a  less  amount  of  labour  and  capital 
than  England  could. 

This  could  not  happen  between  adjacent  places.  If  the  north 
bank  of  the  Thames  possessed  an  advantage  over  the  south  bank 
in  the  production  of  shoes,  no  shoes  would  be  produced  on  the  south 
side ;  the  shoemakers  would  remove  themselves  and  their  capitals 
to  the  north  bank,  or  would  have  established  themselves  there 
originally ;  for,  being  competitors  in  the  same  market  with  those 
on  the  north  side,  they  could  not  compensate  themselves  for  their 
disadvantage  at  the  expense  of  the  consumer:  the  amount  of  it 
would  fall  entirely  on  their  profits ;  and  they  would  not  long  con- 
tent themselves  with  a  smaller  profit,  when,  by  simply  crossing  a 
river,  they  could  increase  it.  But  between  distant  places,  and  espe- 
cially between  different  countries,  profits  may  continue  different ; 
because  persons  do  not  usually  remove  themselves  or  their  capitals 
to  a  distant  place,  without  a  very  strong  motive.  If  capital  removed 
to  remote  parts  of  the  world  as  readily,  and  for  as  small  an  induce- 
ment, as  it  moves  to  another  quarter  of  the  same  town ;  if  people 
would  transport  their  manufactories  to  America  or  China  whenever 
they  could  save  a  small  percentage  in  their  expenses  by  it ;  profits 
would  be  alike  (or  equivalent)  all  over  the  world,  and  all  things 
would  be  produced  in  the  places  where  the  same  labour  and  capi- 
tal would  produce  them  in  greatest  quantity  and  of  best  quality.  A 
tendency  may,  even  now,  be  observed  towards  such  a  state  of  things ; 
capital  is  becoming  more  and  more  cosmopolitan ;  there  is  so  much 
greater  similarity  of  manners  and  institutions  than  formerly,  and  so 
much  less  alienation  of  feeling,  among  the  more  civilized  countries, 
that  both  population  and  capital  now  move  from  one  of  those 
countries  to  another  on  much  less  temptation  than  heretofore. 
But  there  are  still  extraordinary  differences,  both  of  wages  and  of 
profits,  between  different  parts  of  the  world.  It  needs  but  a  small 
motive  to  transplant  capital,  or  even  persons,  from  Warwickshire 
to  Yorkshire ;  but  a  much  greater  to  make  them  remove  to  India, 
the  colonies,  or  Ireland.  To  France,  Germany,  or  Switzerland, 
capital  moves  perhaps  almost  as  readily  as  to  the  colonies;  the 
differences  of  language  and  government  being  scarcely  so  great 
a  hindrance  as  climate  and  distance.  To  countries  still  barbarous, 
or,  like  Russia  or  Turkey,  only  beginning  to  be  civilized,  capital  will 


22  MILL 

not  migrate,  unless  under  the  inducement  of  a  very  great  extra 
profit. 

Between  all  distant  places  therefore  in  some  degree,  but  especially 
between  different  countries  (whether  under  the  same  supreme  gov- 
ernment or  not,)  there  may  exist  great  inequalities  in  the  return 
to  labour  and  capital,  without  causing  them  to  move  from  one  place 
to  the  other  in  such  quantity  as  to  level  those  inequalities.  The  capi- 
tal belonging  to  a  country  will,  to  a  great  extent,  remain  in  the 
country,  even  if  there  be  no  mode  of  employing  it  in  which  it  would 
not  be  more  productive  elsewhere.  Yet  even  a  country  thus  circum- 
stanced might,  and  probably  would,  carry  on  trade  with  other  coun- 
tries. It  would  export  articles  of  some  sort,  even  to  places  which 
could  make  them  with  less  labour  than  itself ;  because  those  coun- 
tries, supposing  them  to  have  an  advantage  over  it  in  all  produc- 
tions, would  have  a  greater  advantage  in  some  things  than  in  others, 
and  would  find  it  their  interest  to  import  the  articles  in  which  their 
advantage  was  smallest,  that  they  might  employ  more  of  their 
labour  and  capital  on  those  in  which  it  was  greatest. 

§  2.  As  I  have  said  elsewhere^  after  Ricardo  (the  thinker  who 
has  done  most  towards  clearing  up  this  subject)  ''it  is  not  a  differ- 
ence in  the  absolute  cost  of  production,  which  determines  the  inter- 
change, but  a  difference  in  the  comparative  cost.  It  may  be  to  our 
advantage  to  procure  iron  from  Sweden  in  exchange  for  cottons,  even 
although  the  mines  of  England  as  well  as  her  manufactories  should 
be  more  productive  than  those  of  Sweden ;  for  if  we  have  an  advan- 
tage of  one-half  in  cottons,  and  only  an  advantage  of  a  quarter  in 
iron,  and  could  sell  our  cottons  to  Sweden  at  the  price  which  Sweden 
must  pay  for  them  if  she  produced  them  herself,  we  should  obtain 
our  iron  with  an  advantage  of  one-half,  as  well  as  our  cottons. 
We  may  often,  by  trading  with  foreigners,  obtain  their  commodities 
at  a  smaller  expense  of  labour  and  capital  than  they  cost  to  the 
foreigners  themselves.  The  bargain  is  still  advantageous  to  the 
foreigner,  because  the  commodity  which  he  receives  in  exchange, 
though  it  has  cost  us  less,  would  have  cost  him  more." 

To  illustrate  the  cases  in  which  interchange  of  commodities  will 
not,  and  those  in  which  it  will,  take  place  between  two  countries, 

^Essays  on  some  Unsettled  Questions  of  Political  Economy,  Essay  I. 


OF  INTERNATIONAL  TRADE  23 

Mr.  Mill,  in  his  Elements  of  Political  Economy,  makes  the  supposi- 
tion, that  Poland  has  an  advantage  over  England  in  the  produc- 
tion both  of  cloth  and  of  corn.  Pie  first  supposes  the  advantage  to 
be  of  equal  amount  in  both  commodities ;  the  cloth  and  the  corn, 
each  of  which  required  100  days'  labour  in  Poland,  requiring  each  150 
days'  labour  in  England.  "It  would  follow,  that  the  cloth  of  150 
days'  labour  in  England,  if  sent  to  Poland,  would  be  equal  to  the 
cloth  of  100  days'  labour  in  Poland  ;  if  exchanged  for  corn,  there- 
fore, it  would  exchange  for  the  corn  of  only  100  days'  labour.  But 
the  corn  of  100  days'  labour  in  Poland,  was  supposed  to  be  the  same 
quantity  with  that  of  150  days'  labour  in  England.  With  150  days' 
labour  in  cloth,  therefore,  England  would  only  get  as  much  corn  in 
Poland  as  she  could  raise  with  150  days'  labour  at  home;  and  she 
would,  in  importing  it,  have  the  cost  of  carriage  besides.  In  these 
circumstances  no  exchange  would  take  place."  In  this  case  the  com- 
parative costs  of  the  two  articles  in  England  and  in  Poland  were 
supposed  to  be  the  same,  though  the  absolute  costs  were  different ; 
on  which  supposition  we  see  that  there  would  be  no  labour  saved 
to  either  country  by  confining  its  industry  to  one  of  the  two  produc- 
tions, and  importing  the  other. 

It  is  otherwise  when  the  comparative,  and  not  merely  the  absolute 
costs  of  the  two  articles  are  different  in  the  two  countries.  "If," 
continues  the  same  author,  "while  the  cloth  produced  with  100  days' 
labour  in  Poland  was  produced  with  150  days'  labour  in  England, 
the  corn  which  was  produced  in  Poland  with  100  days'  labour  could 
not  be  produced  in  England  with  less  than  200  days'  labour;  an 
adequate  motive  to  exchange  would  immediately  arise.  With  a  quan- 
tity of  cloth  which  England  produced  with  150  days'  labour,  she 
would  be  able  to  purchase  as  much  corn  in  Poland  as  was  there  pro- 
duced with  100  days'  labour ;  but  the  quantity  which  was  there 
produced  with  100  days'  labour,  would  be  as  great  as  the  quantity 
produced  in  England  with  200  days'  labour."  By  importing  corn, 
therefore,  from  Poland,  and  paying  for  it  with  cloth,  England  would 
obtain  for  150  days'  labour  what  would  otherwise  cost  her  200; 
being  a  saving  of  50  days'  labour  on  each  repetition  of  the  transaction: 
and  not  merely  a  saving  to  England,  but  a  saving  absolutely ;  for  it 
is  not  obtained  at  the  expense  of  Poland,  who,  with  corn  that  costs 
her  100  days'  labour,  has  purchased  cloth  which,  if  produced  at 


24  MILL 

home,  would  have  cost  her  the  same.  Poland,  therefore,  on  this 
supposition,  loses  nothing ;  but  also  she  derives  no  advantage  from 
the  trade,  the  imported  cloth  costing  her  as  much  as  if  it  were 
made  at  home.  To  enable  Poland  to  gain  anything  by  the  inter- 
change, something  must  be  abated  from  the  gain  of  England :  the 
corn  produced  in  Poland  by  loo  days  labour,  must  be  able  to  pur- 
chase from  England  more  cloth  than  Poland  could  produce  by  that 
amount  of  labour ;  more  therefore  than  England  could  produce  by 
150  days  labour,  England  thus  obtaining  the  corn  which  would  have 
cost  her  200  days,  at  a  cost  exceeding  150,  though  short  of  200. 
England  therefore  no  longer  gains  the  whole  of  the  labour  which  is 
saved  to  the  two  jointly  by  trading  with  one  another. 

§  3.  From  this  exposition  we  perceive  in  what  consists  the  benefit 
of  international  exchange,  or,  in  other  words,  foreign  commerce. 
Setting  aside  its  enabling  countries  to  obtain  commodities  which 
they  could  not  themselves  produce  at  all ;  its  advantage  consists  in 
a  more  efficient  employment  of  the  productive  forces  of  the  world. 
If  two  countries  which  traded  together  attempted,  as  far  as  was 
physically  possible,  to  produce  for  themselves  what  they  now  import 
from  one  another,  the  labour  and  capital  of  the  two  countries  would 
not  be  so  productive,  the  two  together  would  not  obtain  from  their 
industry  so  great  a  quantity  of  commodities,  as  when  each  employs 
itself  in  producing,  both  for  itself  and  for  the  other,  the  things  in 
which  its  labour  is  relatively  most  efficient.  The  addition  thus  made 
to  the  produce  of  the  two  combined,  constitutes  the  advantage  of  the 
trade.  It  is  possible  that  one  of  the  two  countries  may  be  altogether 
inferior  to  the  other  in  productive  capacities,  and  that  its  labour  and 
capital  could  be  employed  to  greatest  advantage  by  being  removed 
bodily  to  the  other.  The  labour  and  capital  which  have  been  sunk 
in  rendering  Holland  habitable,  would  have  produced  a  much  greater 
return  if  transported  to  America  or  Ireland.  The  produce  of  the 
whole  world  would  be  greater,  or  the  labour  less,  than  it  is,  if 
everything  were  produced  where  there  is  the  greatest  absolute  facility 
for  its  production.  But  nations  do  not,  at  least  in  modern  times, 
emigrate  en  masse ;  and  while  the  labour  and  capital  of  a  country 
remain  in  the  country,  they  are  most  beneficially  employed  in  pro- 
ducing for  foreign  markets  as  well  as  for  its  own,  the  things  in 


OF  INTERNATIONAL  TRADE  25 

which  it  lies  under  the  least  disadvantage,  if  there  be  none  in  which 
it  possesses  an  advantage. 

§  4.  Before  proceeding  further,  let  us  contrast  this  view  of  the 
benefits  of  international  commerce  with  other  theories  which  have 
prevailed,  and  which  to  a  certain  extent  still  prevail,  on  the  same 
subject. 

According  to  the  doctrine  now  stated,  the  only  direct  advantage 
of  foreign  commerce  consists  in  the  imports.  A  country  obtains  things 
which  it  either  could  not  have  produced  at  all,  or  which  it  must 
have  produced  at  a  greater  expense  of  capital  and  labour  than  the 
cost  of  the  things  which  it  exports  to  pay  for  them.  It  thus  obtains 
a  more  ample  supply  of  the  commodities  it  wants,  for  the  same 
labour  and  capital ;  or  the  same  supply,  for  less  labour  and  capital, 
leaving  the  surplus  disposable  to  produce  other  things.  The  vulgar 
theory  disregards  this  benefit  and  deems  the  advantage  of  commerce 
to  reside  in  the  exports :  as  if  not  what  a  country  obtains,  but  what 
it  parts  with,  by  its  foreign  trade,  was  supposed  to  constitute  the  gain 
to  it.  An  extended  market  for  its  produce — an  abundant  consump- 
tion for  its  goods — a  vent  for  its  surplus — are  the  phrases  by  which 
it  has  been  customary  to  designate  the  uses  and  recommendations 
of  commerce  with  foreign  countries.  This  notion  is  intelligible,  when 
we  consider  that  the  authors  and  leaders  of  opinion  on  mercantile 
questions  have  always  hitherto  been  the  selling  class.  It  is  in  truth 
a  surviving  relic  of  the  Mercantile  Theory,  according  to  which,  money 
being  the  only  wealth,  selling,  or  in  other  words,  exchanging  goods  for 
money  was  (to  countries  without  mines  of  their  own)  the  only  way 
of  growing  rich — and  importation  of  goods,  that  is  to  say,  parting 
with  money,  was  so  much  subtracted  from  the  benefit. 

The  notion  that  money  alone  is  wealth,  has  been  long  defunct, 
but  it  has  left  many  of  its  progeny  behind  it ;  and  even  its  destroyer 
Adam  Smith,  retained  some  opinions  which  it  is  impossible  to  trace 
to  any  other  origin.  Adam  Smith's  theory  of  the  benefit  of  foreign 
trade,  was  that  it  afforded  an  outlet  for  the  surplus  produce  of  a 
country,  and  enabled  a  portion  of  the  capital  of  the  country  to  replace 
itself  with  a  profit.  These  expressions  suggest  ideas  inconsistent  with 
a  clear  conception  of  the  phenomena.  The  expression,  surplus  prod- 
uce, seems  to  imply  that  a  country  is  under  some  kind  of  necessity 


26  MILL 

of  producing  the  corn  or  cloth  which  it  exports ;  so  that  the  portion 
which  it  does  not  itself  consume,  if  not  wanted  and  consumed  else- 
where, would  either  be  produced  in  sheer  waste,  or  if  it  were  not 
produced,  the  corresponding  portion  of  capital  would  remain  idle, 
and  the  mass  of  productions  in  the  country  would  be  diminished  by 
so  much.  Either  of  these  suppositions  would  be  entirely  erroneous. 
The  country  produces  an  exportable  article  in  excess  of  its  own 
wants,  from  no  inherent  necessity,  but  as  the  cheapest  mode  of 
supplying  itself  with  other  things.  If  prevented  from  exporting  this 
surplus,  it  would  cease  to  produce  it,  and  would  no  longer  import 
anything,  being  unable  to  give  an  equivalent ;  but  the  labour  and 
capital  which  had  been  employed  in  producing  with  a  view  to  exporta- 
tion, would  find  employment  in  producing  those  desirable  objects 
which  were  previously  brought  from  abroad :  or,  if  some  of  them 
could  not  be  produced,  in  producing  substitutes  for  them.  These  arti- 
cles would  of  course  be  produced  at  a  greater  cost  than  that  of 
the  things  with  which  they  had  previously  been  purchased  from 
foreign  countries.  But  the  value  and  price  of  the  articles  would  rise 
in  proportion ;  and  the  capital  would  just  as  much  be  replaced,  with 
the  ordinary  profit,  from  the  returns,  as  it  was  when  employed  in 
producing  for  the  foreign  market.  The  only  losers  (after  the  tem- 
porary inconvenience  of  the  change)  would  be  the  consumers  of 
the  heretofore  imported  articles ;  who  would  be  obliged  either 
to  do  without  them,  consuming  in  lieu  of  them  something  which 
they  did  not  like  as  well,  or  to  pay  a  higher  price  for  them  than 
before. 

There  is  much  misconception  in  the  common  notion  of  what  com- 
merce does  for  a  country.  When  commerce  is  spoken  of  as  a  source 
of  national  wealth,  the  imagination  fixes  itself  upon  the  large  fortunes 
acquired  by  merchants,  rather  than  upon  the  saving  of  price  to  con- 
sumers. But  the  gains  of  merchants,  when  they  enjoy  no  exclusive 
privilege,  are  no  greater  than  the  profits  obtained  by  the  employment 
of  capital  in  the  country  itself.  If  it  be  said  that  the  capital  now 
employed  in  foreign  trade  could  not  find  employment  in  supplying 
the  home  market,  I  might  reply,  that  this  is  the  fallacy  of  general  over- 
production, discussed  in  a  former  chapter ;  but  the  thing  is  in  this 
particular  case  too  evident,  to  require  an  appeal  to  any  general  theory. 


OF  INTERNATIONAL  TRADE  27 

We  not  only  see  that  the  capital  of  the  merchant  would  find  employ- 
ment, but  we  see  what  employment.  There  would  be  employment 
created,  equal  to  that  which  would  be  taken  away.  Exportation 
ceasing,  importation  to  an  equal  value  would  cease  also,  and  all  that 
part  of  the  income  of  the  country  which  had  been  expended  in 
imported  commodities,  would  be  ready  to  expend  itself  on  the  same 
things  produced  at  home,  or  on  others  instead  of  them.  Commerce 
is  virtually  a  mode  of  cheapening  production ;  and  in  all  such  cases 
the  consumer  is  the  person  ultimately  benefited ;  the  dealer,  in  the 
end,  is  sure  to  get  his  profit,  whether  the  buyer  obtains  much  or 
little  for  his  money.  This  is  said  without  prejudice  to  the  effect 
(already  touched  upon,  and  to  be  hereafter  fully  discussed)  which 
the  cheapening  of  commodities  may  have  in  raising  profits ;  in  the 
case  when  the  commodity  cheapened,  being  one  of  those  consumed 
by  labourers,  enters  into  the  cost  of  labour,  by  which  the  rate  of 
profits  is  determined. 

§  5.  Such,  then,  is  the  direct  economical  advantage  of  foreign 
trade.  But  there  are,  besides,  indirect  effects,  which  must  be  counted 
as  benefits  of  a  high  order.  One  is,  the  tendency  of  every  extension 
of  the  market  to  improve  the  processes  of  production.  A  country 
which  produces  for  a  larger  market  than  its  own,  can  introduce  a 
more  extended  division  of  labour,  can  make  greater  use  of  machinery, 
and  is  more  likely  to  make  inventions  and  improvements  in  the 
processes  of  production.  Whatever  causes  a  greater  quantity  of  any- 
thing to  be  produced  in  the  same  place,  tends  to  the  general  increase 
of  the  productive  powers  of  the  world.  There  is  another  considera- 
tion, principally  applicable  to  an  early  stage  of  industrial  advance- 
ment. A  people  may  be  in  a  quiescent,  indolent,  uncultivated  state, 
with  all  their  tastes  either  fully  satisfied  or  entirely  undeveloped, 
and  they  may  fail  to  put  forth  the  whole  of  their  productive  ener- 
gies for  want  of  any  sufficient  object  of  desire.  The  opening  of  a 
foreign  trade,  by  making  them  acquainted  with  new  objects,  or 
tempting  them  by  the  easier  acquisition  of  things  which  they  had  not 
previously  thought  attainable,  sometimes  works  a  sort  of  industrial 
revolution  in  a  country  whose  resources  were  previously  undeveloped 
for  want  of  energy  and  ambition  in  the  people :  inducing  those  who 


28  :mill 

were  satisfied  with  scanty  comforts  and  little  work,  to  work  harder 
for  the  gratification  of  their  new  tastes,  and  even  to  save,  and  ac- 
cumulate capital,  for  the  still  more  complete  satisfaction  of  those 
tastes  at  a  future  time. 

But  the  economical  advantages  of  commerce  are  surpassed  in 
importance  by  those  of  its  effects  which  are  intellectual  and  moral. 
It  is  hardly  possible  to  overrate  the  value,  in  the  present  low  state 
of  human  improvement,  of  placing  human  beings  in  contact  with 
persons  dissimilar  to  themselves,  and  with  modes  of  thought  and 
action  unlike  those  with  which  they  are  familiar.  Commerce  is  now, 
what  war  once  was,  the  principal  source  of  this  contact.  Commercial 
adventurers  from  more  advanced  countries  have  generally  been  the 
first  civilizers  of  barbarians.  And  commerce  is  the  purpose  of  the  far 
greater  part  of  the  communication  which  takes  place  between  civi- 
lized nations.  Such  communication  has  always  been,  and  is  peculiarly 
in  the  present  age,  one  of  the  primary  sources  of  progress.  To  human 
beings,  who,  as  hitherto  educated,  can  scarcely  cultivate  even  a  good 
quality  without  running  it  into  a  fault,  it  is  indispensable  to  be 
perpetually  comparing  their  own  notions  and  customs  with  the 
experience  and  example  of  persons  in  different  circumstances  from 
themselves :  and  there  is  no  nation  which  does  not  need  to  borrow 
from  others,  not  merely  particular  arts  or  practices,  but  essential 
points  of  character  in  which  its  own  type  is  inferior.  Finally,  com- 
merce first  taught  nations  to  see  with  good  will  the  wealth  and 
prosperity  of  one  another.  Before,  the  patriot,  unless  sufficiently 
advanced  in  culture  to  feel  the  world  his  country,  wished  all  coun- 
tries weak,  poor,  and  ill-governed,  but  his  own :  he  now  sees  in  their 
wealth  and  progress  a  direct  source  of  wealth  and  progress  to  his 
own  country.  It  is  commerce  which  is  rapidly  rendering  war  obsolete, 
by  strengthening  and  multiplying  the  personal  interests  which  are 
in  natural  opposition  to  it.  And  it  may  be  said  without  exaggeration 
that  the  great  extent  and  rapid  increase  of  international  trade,  in 
being  the  principal  guarantee  of  the  peace  of  the  world,  is  the  great 
permanent  security  for  the  uninterrupted  progress  of  the  ideas,  the 
institutions,  and  the  character  of  the  human  race. 


OF  INTERNATIONAL  VALUES  29 


MILL:  OF  INTERNATIONAL  VALUES^ 

§  I.  The  values  of  commodities  produced  at  the  same  place,  or  in 
places  sufficiently  adjacent  for  capital  to  move  freely  between 
them — let  us  say,  for  simplicity,  of  commodities  produced  in  the  same 
country — depend  (temporary  fluctuations  apart)  upon  their  cost  of 
production.  But  the  value  of  a  commodity  brought  from  a  distant 
place,  especially  from  a  foreign  country,  does  not  depend  on  its 
cost  of  production  in  the  place  from  whence  it  comes.  On  what, 
then,  does  it  depend  ?  The  value  of  a  thing  in  any  place,  depends  on 
the  cost  of  its  acquisition  in  that  place ;  which  in  the  case  of  an 
imported  article,  means  the  cost  of  production  of  the  thing  which  is 
exported  to  pay  for  it. 

Since  all  trade  is  in  reality  barter,  money  being  a  mere  instrument 
for  exchanging  things  against  one  another,  we  will,  for  simplicity, 
begin  by  supposing  the  international  trade  to  be  in  form,  what  it 
always  is  in  reality,  an  actual  trucking  of  one  commodity  against 
another.  As  far  as  we  have  hitherto  proceeded,  we  have  found 
all  the  laws  of  interchange  to  be  essentially  the  same,  whether  money 
is  used  or  not ;  money  never  governing,  but  always  obeying,  those 
general  laws. 

If,  then,  England  imports  wine  from  Spain,  giving  for  every  pipe 
of  wine  a  bale  of  cloth,  the  exchange  value  of  a  pipe  of  wine  in 
England  will  not  depend  upon  what  the  production  of  the  wine  may 
have  cost  in  Spain,  but  upon  what  the  production  of  the  cloth  has 
cost  in  England.  Though  the  wine  may  have  cost  in  Spain  the 
equivalent  of  only  ten  days  labour,  yet,  if  the  cloth  costs  in  England 
twenty  days  labour,  the  wine,  when  brought  to  England,  will 
exchange  for  the  produce  of  twenty  days  English  labour,  plus 
the  cost  of  carriage ;  including  the  usual  profit  on  the  importer's 
capital  during  the  time  it  is  locked  up,  and  withheld  from  other 
employment. 

The  value,  then,  in  any  country,  of  a  foreign  commodity,  depends 
on  the  quantity  of  home  produce  which  must  be  given  to  the  foreign 
country  in  exchange  for  it.  In  other  words,  the  values  of  foreign 
commodities  depend  on  the  terms  of  international  exchange.    What, 

iMill,  Principles,  Bk.  Ill,  chap,  xviii. 


30  MILL 

then,  do  these  depend  upon  ?  What  is  it,  which,  in  the  case  supposed, 
causes  a  pipe  of  wine  from  Spain  to  be  exchanged  with  England  for 
exactly  that  quantity  of  cloth?  We  have  seen  that  it  is  not  their 
cost  of  production.  If  the  cloth  and  the  wine  were  both  made  in 
Spain,  they  would  exchange  at  their  cost  of  production  in  Spain  ; 
if  they  were  both  made  in  England,  they  would  exchange  at  their 
cost  of  production  in  England :  but  all  the  cloth  being  made  in 
England,  and  all  the  wine  in  Spain,  they  are  in  circumstances  to 
which  we  have  already  determined  that  the  law  of  cost  of  produc- 
tion is  not  applicable.  We  must  accordingly,  as  we  have  done  before 
in  a  similar  embarrassment,  fall  back  upon  an  antecedent  law,  that 
of  supply  and  demand :  and  in  this  we  shall  again  find  the  solution 
of  our  difficulty. 

I  have  discussed  this  question  in  a  separate  Essay,  already  once 
referred  to ;  and  a  quotation  of  part  of  the  exposition  then  given, 
will  be  the  best  introduction  to  my  present  view  of  the  subject. 
I  must  give  notice  that  we  are  now  in  the  region  of  the  most  compli- 
cated questions  which  political  economy  affords ;  that  the  subject  is 
one  which  cannot  possibly  be  made  elementary ;  and  that  a  more 
continuous  effort  of  attention  than  has  yet  been  required,  will  be 
necessary  to  follow  the  series  of  deductions.  The  thread,  however, 
which  we  are  about  to  take  in  hand,  is  in  itself  very  simple  and 
manageable ;  the  only  difficulty  is  in  following  it  through  the  wind- 
ings and  entanglements  of  complex  international  transactions. 

§  2.  "When  the  trade  is  established  between  the  two  countries, 
the  two  commodities  will  exchange  for  each  other  at  the  same  rate  of 
interchange  in  both  countries — bating  the  cost  of  carriage,  of  which, 
for  the  present,  it  will  be  more  convenient  to  omit  the  consideration. 
Supposing,  therefore,  for  the  sake  of  argument,  that  the  carriage 
of  the  commodities  from  one  country  to  the  other  could  be  effected 
without  labour  and  without  cost,  no  sooner  would  the  trade  be  opened 
than  the  value  of  the  two  commodities,  estimated  in  each  other, 
would  come  to  a  level  in  both  countries. 

"Suppose  that  lo  yards  of  broadcloth  cost  in  England  as  much 
labour  as  15  yards  of  linen,  and  in  Germany  as  much  as  20."  In  com- 
mon with  most  of  my  predecessors,  I  find  it  advisable,  in  these  intri- 
cate investigations,  to  give  distinctness  and  fixity  to  the  conception 


OF  INTERNATIONAL  VALUES  31 

by  numerical  examples.  These  examples  must  sometimes,  as  in 
the  present  case,  be  purely  supposititious.  I  should  have  preferred 
real  ones  ;  but  all  that  is  essential  is  that  the  numbers  should  be 
such  as  admit  of  being  easily  followed  through  the  subsequent 
combinations  into  which  they  enter. 

This  supposition  then  being  made,  it  would  be  the  interest  of 
England  to  import  linen  from  Germany,  and  of  Germany  to  import 
cloth  from  England.  "When  each  country  produced  both  commod- 
ities for  itself,  10  yards  of  cloth  exchanged  for  15  yards  of  linen  in 
England,  and  for  20  in  Germany.  They  will  now  exchange  for  the 
same  number  of  yards  of  linen  in  both.  For  what  number?  If  for 
15  yards,  England  will  be  just  as  she  was,  and  Germany  will  gain  all. 
If  for  20  yards,  Germany  will  be  as  before,  and  England  will  derive 
the  whole  of  the  benefit.  If  for  any  number  intermediate  between 
15  and  20,  the  advantage  will  be  shared  between  the  two  countries. 
If,  for  example,  10  yards  of  cloth  exchange  for  18  of  linen,  England 
will  gain  an  advantage  of  3  yards  on  every  15,  Germany  will  save 
2  out  of  every  20.  The  problem  is,  what  are  the  causes  which 
determine  the  proportion  in  which  the  cloth  of  England  and  the 
linen  of  Germany  will  exchange  for  each  other. 

"As  exchange  value,  in  this  case  as  in  every  other,  is  proverbially 
fluctuating,  it  does  not  matter  what  we  suppose  it  to  be  when  we 
begin :  we  shall  soon  see  whether  there  be  any  fixed  point  about 
which  it  oscillates,  which  it  has  a  tendency  always  to  approach  to, 
and  to  remain  at.  Let  us  suppose,  then,  that  by  the  effect  of  what 
Adam  Smith  calls  the  higgling  of  the  market,  10  yards  of  cloth, 
in  both  countries,  exchange  for  17  yards  of  linen. 

"The  demand  for  a  commodity,  that  is,  the  quantity  of  it  which 
can  find  a  purchaser,  varies,  as  we  have  before  remarked,  according 
to  the  price.  In  Germany  the  price  of  10  yards  of  cloth  is  now 
17  yards  of  linen,  or  whatever  quantity  of  money  is  equivalent  in 
Germany  to  17  yards  of  linen.  Now,  that  being  the  price,  there 
is  some  particular  number  of  yards  of  cloth,  which  will  be  in 
demand,  or  will  find  purchasers,  at  that  price.  There  is  some 
given  quantity  of  cloth,  more  than  which  could  not  be  disposed 
of  at  that  price ;  less  than  which,  at  that  price,  would  not  fully 
satisfy  the  demand.  Let  us  suppose  this  quantity  to  be  1000  times 
10  yards. 


32 


MILL 


"Let  us  now  turn  our  attention  to  England.  There  the  price  of 
17  yards  of  hnen  is  10  yards  of  doth,  or  whatever  quantity  of 
money  is  equivalent  in  England  to  10  yards  of  cloth.  There  is  some 
particular  number  of  yards  of  linen  which,  at  that  price,  will 
exactly  satisfy  the  demand,  and  no  more.  Let  us  suppose  that  this 
number  is  1000  times  17  yards. 

"As  17  yards  of  linen  are  to  10  yards  of  cloth,  so  are  1000  times 
17  yards  to  1000  times  10  yards.  At  the  existing  exchange  value, 
the  linen  which  England  requires  will  exactly  pay  for  the  quantity 
of  cloth  which,  on  the  same  terms  of  interchange,  Germany  requires. 
The  demand  on  each  side  is  precisely  sufficient  to  carry  off  the 
supply  on  the  other.  The  conditions  required  by  the  principle  of 
demand  and  supply  are  fulfilled,  and  the  two  commodities  will  con- 
tinue to  be  interchanged,  as  we  supposed  them  to  be,  in  the  ratio 
of  17  yards  of  linen  for  10  yards  of  cloth. 

"But  our  suppositions  might  have  been  different.  Suppose  that, 
at  the  assumed  rate  of  interchange,  England  had  been  disposed  to 
consume  no  greater  quantity  of  linen  than  800  times  17  yards:  it  is 
evident  that,  at  the  rate  supposed,  this  would  not  have  sufficed  to 
pay  for  the  1000  times  10  yards  of  cloth  which  we  have  supposed 
Germany  to  require  at  the  assumed  value.  Germany  would  be  able 
to  procure  no  more  than  800  times  10  yards  at  that  price.  To 
procure  the  remaining  200,  which  she  would  have  no  means  of  doing 
but  by  bidding  higher  for  them,  she  would  offer  more  than  17  yards 
of  linen  in  exchange  for  10  yards  of  cloth:  let  us  suppose  her  to 
offer  18.  At  this  price,  perhaps,  England  would  be  inclined  to 
purchase  a  greater  quantity  of  linen.  She  would  consume,  possibly, 
at  that  price,  900  times  18  yards.  On  the  other  hand,  cloth  having 
risen  in  price,  the  demand  of  Germany  for  it  would  probably  have 
diminished.  If,  instead  of  1000  times  10  yards,  she  is  now  contented 
with  900  times  10  yards,  these  will  exactly  pay  for  the  900  times  18 
yards  of  linen  which  England  is  willing  to  take  at  the  altered  price : 
the  demand  on  each  side  will  again  exactly  suffice  to  take  off  the 
corresponding  supply  ;  and  10  yards  for  18  will  be  the  rate  at  which, 
in  both  countries,  cloth  will  exchange  for  linen. 

"The  converse  of  all  this  would  have  happened,  if,  instead  of 
800  times  17  yards,  we  had  supposed  that  England,  at  the  rate  of  10 
for  17,  would  have  taken   1200  times   17  yards  of  linen.    In  this 


OF  INTERNATIONAL  VALUES  S3 

case,  it  is  England  whose  demand  is  not  fully  supplied  ;  it  is  England 
who  by  bidding  for  more  linen,  will  alter  the  rate  of  interchange 
to  her  own  disadvantage ;  and  lo  yards  of  cloth  will  fall,  in  both 
countries,  below  the  value  of  17  yards  of  linen.  By  this  fall  of 
cloth,  or  what  is  the  same  thing,  this  rise  of  linen,  the  demand  of 
Germany  for  cloth  will  increase,  and  the  demand  of  England  for 
linen  will  diminish,  till  the  rate  of  interchange  has  so  adjusted  itself 
that  the  cloth  and  the  linen  will  exactly  pay  for  one  another ;  and 
when  once  this  point  is  attained,  values  will  remain  without  further 
alteration. 

"It  may  be  considered,  therefore,  as  established,  that  when  two 
countries  trade  together  in  two  commodities,  the  exchange  value  of 
these  commodities  relatively  to  each  other  will  adjust  itself  to  the 
inclinations  and  circumstances  of  the  consumers  on  both  sides,  in 
such  manner  that  the  quantities  required  by  each  country,  of  the 
articles  which  it  imports  from  its  neighbour,  shall  be  exactly  suffi- 
cient to  pay  for  one  another.  As  the  inclinations  and  circumstances 
of  consumers  cannot  be  reduced  to  any  rule,  so  neither  can  the  pro- 
portions in  which  the  two  commodities  will  be  interchanged.  We 
know  that  the  limits  within  which  the  variation  is  confined,  are  the 
ratio  between  their  costs  of  production  in  the  one  country,  and  the 
ratio  between  their  costs  of  production  in  the  other.  Ten  yards  of 
cloth  cannot  exchange  for  more  than  20  yards  of  linen,  nor  for  less 
than  15.  But  they  may  exchange  for  any  intermediate  number.  The 
ratios,  therefore,  in  which  the  advantage  of  the  trade  may  be  divided 
between  the  two  nations,  are  various.  The  circumstances  on  which 
the  proportionate  share  of  each  country  more  remotely  depends, 
admit  only  of  a  very  general  indication. 

"It  is  even  possible  to  conceive  an  extreme  case,  in  which  the 
whole  of  the  advantage  resulting  from  the  interchange  would  be 
reaped  by  one  party,  the  other  country  gaining  nothing  at  all.  There 
is  no  absurdity  in  the  hypothesis  that,  of  some  given  commodity,  a 
certain  quantity  is  all  that  is  wanted  at  any  price ;  and  that,  when 
that  quantity  is  obtained,  no  fall  in  the  exchange  value  would  induce 
other  consumers  to  come  forward,  or  those  who  are  already  supplied, 
to  take  more.  Let  us  suppose  that  this  is  the  case  in  Germany  with 
cloth.  Before  her  trade  with  England  commenced,  when  10  yards  of 
cloth  cost  her  as  much  labour  as  20  yards  of  linen,  she  nevertheless 


34  MILL 

consumed  as  much  cloth  as  she  wanted  under  any  circumstances, 
and,  if  she  could  obtain  it  at  the  rate  of  lo  yards  of  cloth  for  15 
of  linen,  she  would  not  consume  more.  Let  this  fixed  quantity  be 
1000  times  10  yards.  At  the  rate,  however,  of  10  for  20,  England 
would  want  more  linen  than  would  be  equivalent  to  this  quantity 
of  cloth.  She  would,  consequently,  offer  a  higher  value  for  linen ; 
or,  what  is  the  same  thing,  she  would  offer  her  cloth  at  a  cheaper 
rate.  But,  as  by  no  lowering  of  the  value  could  she  prevail  on 
Germany  to  take  a  greater  quantity  of  cloth,  there  would  be  no 
limit  to  the  rise  of  linen  or  fall  of  cloth,  until  the  demand  of  England 
for  linen  was  reduced  by  the  rise  of  its  value,  to  the  quantity  which 
1000  times  10  yards  of  cloth  would  purchase.  It  might  be,  that  to 
produce  this  diminution  of  the  demand  a  less  fall  would  not  suffice 
than  that  which  would  make  10  yards  of  cloth  exchange  for  15  of 
linen.  Germany  would  then  gain  the  whole  of  the  advantage,  and 
England  would  be  exactly  as  she  was  before  the  trade  commenced. 
It  would  be  for  the  interest,  however,  of  Germany  herself  to  keep  her 
linen  a  little  below  the  value  at  which  it  could  be  produced  in  Eng- 
land, in  order  to  keep  herself  from  being  supplanted  by  the  home 
producer.  England,  therefore,  would  always  benefit  in  some  degree 
by  the  existence  of  the  trade,  though  it  might  be  a  very  trifling  one." 
In  this  statement,  I  conceive,  is  contained  the  first  elementary 
principle  of  International  Values.  I  have,  as  is  indispensable  in  such 
abstract  and  hypothetical  cases,  supposed  the  circumstances  to  be 
much  less  complex  than  they  really  are:  in  the  first  place,  by  sup- 
pressing the  cost  of  carriage :  next,  by  supposing  that  there  are  only 
two  countries  trading  together ;  and  lastly,  that  they  trade  only  in 
two  commodities.  To  render  the  exposition  of  the  principle  complete, 
it  is  necessary  to  restore  the  various  circumstances  thus  temporarily 
left  out  to  simplify  the  argument.  Those  who  are  accustomed  to  any 
kind  of  scientific  investigation  will  probably  see,  without  formal 
proof,  that  the  introduction  of  these  circumstances  cannot  alter  the 
theory  of  the  subject.  Trade  among  any  number  of  countries,  and 
in  any  number  of  commodities,  must  take  place  on  the  same  essen- 
tial principles  as  trade  between  two  countries  and  in  two  commod- 
ities. Introducing  a  greater  number  of  agents  precisely  similar, 
cannot  change  the  law  of  their  action,  no  more  than  putting 
additional   weights   into   the    two   scales   of   a   balance   alters   the 


OF  INTERNATIONAL  VALUES  35 

law  of  gravitation.  It  alters  nothing  but  the  numerical  results. 
For  more  complete  satisfaction,  however,  we  will  enter  into  the 
complex  cases  with  the  same  particularity  with  which  we  have 
stated   the   simpler  one. 

§  3.  First,  let  us  introduce  the  element  of  cost  of  carriage.  The 
chief  difference  will  then  be,  that  the  cloth  and  the  linen  will  no 
longer  exchange  for  each  other  at  precisely  the  same  rate  in  both 
countries.  Linen,  having  to  be  carried  to  England,  will  be  dearer 
there  by  its  cost  of  carriage ;  and  cloth  will  be  dearer  in  Germany 
by  the  cost  of  carrying  it  from  England.  Linen,  estimated  in  cloth, 
will  be  dearer  in  England  than  in  Germany,  by  the  cost  of  carriage 
of  both  articles :  and  so  will  cloth  in  Germany,  estimated  in  linen. 
Suppose  that  the  cost  of  carriage  of  each  is  equivalent  to  one  yard 
of  linen  ;  and  suppose  that,  if  they  could  have  been  carried  without 
cost,  the  terms  of  interchange  would  have  been  10  yards  of  cloth  for 
17  of  linen.  It  may  seem  at  first  that  each  country  will  pay  its  own 
cost  of  carriage ;  that  is,  the  carriage  of  the  article  it  imports ;  that 
in  Germany  10  yards  of  cloth  will  exchange  for  18  of  linen,  namely, 
the  original  17,  and  i  to  cover  the  cost  of  carriage  of  the  cloth; 
while  in  England,  10  yards  of  cloth  will  only  purchase  16  of  linen, 
I  yard  being  deducted  for  the  cost  of  carriage  of  the  linen.  This, 
however,  cannot  be  affirmed  with  certainty ;  it  will  only  be  true,  if 
the  linen  which  the  English  consumers  would  take  at  the  price  of  10 
for  16,  exactly  pays  for  the  cloth  which  the  German  consumers 
would  take  at  10  for  18.  The  values,  whatever  they  are,  must  es- 
tablish this  equilibrium.  No  absolute  rule,  therefore,  can  be  laid 
down  for  the  division  of  the  cost,  no  more  than  for  the  division  of 
the  advantage :  and  it  does  not  follow  that  in  whatever  ratio  the  one 
is  divided,  the  other  will  be  divided  in  the  same.  It  is  impossible 
to  say,  if  the  cost  of  carriage  could  be  annihilated,  whether  the 
producing  or  the  importing  country  would  be  most  benefited.  This 
would  depend  on  the  play  of  international  demand. 

Cost  of  carriage  has  one  effect  more.  But  for  it,  every  commodity 
would  (if  trade  be  supposed  free)  be  either  regularly  imported  or 
regularly  exported.  A  country  would  make  nothing  for  itself  which 
it  did  not  also  make  for  other  countries.  But  in  consequence  of  cost 
of  carriage  there  are  many  things,  especially  bulky  articles,  which 


36  MILL 

every,  or  almost  every  country  produces  within  itself.  After  exporting 
the  things  in  which  it  can  employ  itself  most  advantageously,  and  im- 
porting those  in  which  it  is  under  the  greatest  disadvantage,  there 
are  many  lying  between,  of  which  the  relative  cost  of  production  in 
that  and  in  other  countries  differs  so  little,  that  the  cost  of  carriage 
would  absorb  more  than  the  whole  saving  in  cost  of  production  which 
would  be  obtained  by  importing  one  and  exporting  another.  This  is 
the  case  with  numerous  commodities  of  common  consumption ; 
including  the  coarser  qualities  of  many  articles  of  food  and  manu- 
facture, of  which  the  finer  kinds  are  the  subject  of  extensive  inter- 
national traffic. 

§  4.  Let  us  now  introduce  a  greater  number  of  commodities  than 
the  two  we  have  hitherto  supposed.  Let  cloth  and  linen,  however, 
be  still  the  articles  of  which  the  comparative  cost  of  production  in 
England  and  in  Germany  differ  the  most ;  so  that  if  they  were 
confined  to  two  commodities,  these  would  be  the  two  which  it  would 
be  most  their  interest  to  exchange.  We  will  now  again  omit  cost  of 
carriage,  which,  having  been  shown  not  to  affect  the  essentials  of  the 
question,  does  but  embarrass  unnecessarily  the  statement  of  it.  Let 
us  suppose,  then,  that  the  demand  of  England  for  linen  is  either 
so  much  greater  than  that  of  Germany  for  cloth,  or  so  much  more 
extensible  by  cheapness,  that  if  England  had  no  commodity  but 
cloth  which  Germany  would  take,  the  demand  of  England  would 
force  up  the  terms  of  interchange  to  10  yards  of  cloth  for  only  16  of 
linen,  so  that  England  would  gain  only  the  difference  between  15  and 
16,  Germany  the  difference  between  16  and  20.  But  let  us  now 
suppose  that  England  has  also  another  commodity,  say  iron,  which 
is' in  demand  in  Germany,  and  that  the  quantity  of  iron  which  is  of 
equal  value  in  England  with  10  yards  of  cloth,  (let  us  call  this 
quantity  a  hundred  weight)  will,  if  produced  in  Germany,  cost  as 
much  labour  as  18  yards  of  linen,  so  that  if  offered  by  England  for  17, 
it  will  undersell  the  German  producer.  In  these  circumstances,  linen 
will  not  be  forced  up  to  the  rate  of  16  yards  for  10  of  cloth,  but 
will  stop,  suppose  at  17;  for  although,  at  that  rate  of  interchange, 
Germany  will  not  take  enough  cloth  to  pay  for  all  the  linen  required 
by  England,  she  will  take  iron  for  the  remainder,  and  it  is  the  same 
thing  to  England  whether  she  gives  a  hundred  weight  of  iron  or 


OF  INTERNATIONAL  VALUES  37 

10  yards  of  cloth,  both  being  made  at  the  same  cost.  If  we  now 
superadd  coals  or  cottons  on  the  side  of  England,  and  wine,  or  corn, 
or  timber,  on  the  side  of  Germany,  it  will  make  no  difference  in  the 
principle.  The  exports  of  each  country  must  exactly  pay  for  the 
imports ;  meaning  now  the  aggregate  exports  and  imports,  not  those 
of  particular  commodities  taken  singly.  The  produce  of  fifty  days 
English  labour,  whether  in  cloth,  coals,  iron,  or  any  other  exports,  will 
exchange  for  the  produce  of  forty,  or  fifty,  or  sixty  days  German 
labour,  in  linen,  wine,  corn,  or  timber,  according  to  the  international 
demand.  There  is  some  proportion  at  which  the  demand  of  the 
two  countries  for  each  other's  products  will  exactly  correspond ;  so 
that  the  things  supplied  by  England  to  Germany  will  be  completely 
paid  for,  and  no  more,  by  those  supplied  by  Germany  to  England. 
This  accordingly  will  be  the  ratio  in  which  the  produce  of  English  and 
the  produce  of  German  labour  will  exchange  for  one  another. 

If,  therefore,  it  be  asked  what  country  draws  to  itself  the  greatest 
share  of  the  advantage  of  any  trade  it  carries  on,  the  answer  is,  the 
country  for  whose  productions  there  is  in  other  countries  the  greatest 
demand,  and  a  demand  the  most  susceptible  of  increase  from  addi- 
tional cheapness.  In  so  far  as  the  productions  of  any  country  possess 
this  property,  the  country  obtains  all  foreign  commodities  at  less 
cost.  It  gets  its  imports  cheaper,  the  greater  the  intensity  of  the 
demand  in  foreign  countries  for  its  exports.  It  also  gets  its  imports 
cheaper,  the  less  the  extent  and  intensity  of  its  own  demand  for 
them.  The  market  is  cheapest  to  those  whose  demand  is  small. 
A  country  which  desires  few  foreign  productions,  and  only  a  limited 
quantity  of  them,  while  its  own  commodities  are  in  great  request 
in  foreign  countries,  will  obtain  its  limited  imports  at  extremely 
small  cost,  that  is,  in  exchange  for  the  produce  of  a  very  small 
quantity  of  its  labour  and  capital. 

Lastly,  having  introduced  more  than  the  original  two  commodities 
into  the  hypothesis,  let  us  also  introduce  more  than  the  original  two 
countries.  After  the  demand  of  England  for  the  linen  of  Germany 
has  raised  the  rate  of  interchange  to  10  yards  of  cloth  for  16  of 
linen,  suppose  a  trade  opened  between  England  and  some  other 
country  which  also  exports  linen.  And  let  us  suppose  that  if  Eng- 
land had  no  trade  but  with  this  third  country,  the  play  of  interna- 
tional demand  would  enable  her  to  obtain  from  it,  for  10  yards  of 


38  .       MILL 

cloth  or  its  equivalent,  17  yards  of  linen.  She  evidently  would  not 
go  on  buying  linen  from  Germany  at  the  former  rate:  Germany 
would  be  undersold,  and  must  consent  to  give  1 7  yards,  like  the  other 
country.  In  this  case,  the  circumstances  of  production  and  of 
demand  in  the  third  country  are  supposed  to  be  in  themselves  more 
advantageous  to  England  than  the  circumstances  of  Germany ;  but 
this  supposition  is  not  necessary :  we  might  suppose  that  if  the  trade 
with  Germany  did  not  exist,  England  would  be  obliged  to  give  to 
the  other  country  the  same  advantageous  terms  which  she  gives  to 
German}^;  10  yards  of  cloth  for  16,  or  even  less  than  16,  of  linen. 
Even  so,  the  opening  of  the  third  country  makes  a  great  difference 
in  favour  of  England.  There  is  now  a  double  market  for  English 
exports,  while  the  demand  of  England  for  linen  is  only  what  it  was 
before.  This  necessarily  obtains  for  England  more  advantageous 
terms  of  interchange.  The  two  countries,  requiring  much  more  of 
her  produce  than  was  required  by  either  alone,  must,  in  order  to 
obtain  it,  force  an  increased  demand  for  their  exports,  by  offering 
them  at  a  lower  value. 

It  deserves  notice,  that  this  effect  in  favour  of  England  from  the 
opening  of  another  market  for  her  exports,  will  equally  be  produced 
even  though  the  country  from  which  the  demand  comes  should  have 
nothing  to  sell  which  England  is  willing  to  take.  Suppose  that  the 
third  country,  though  requiring  cloth  or  iron  from  England,  produces 
no  linen,  nor  any  other  article  which  is  in  demand  there.  She  how- 
ever produces  exportable  articles,  or  she  would  have  no  means  of  pay- 
ing for  imports :  her  exports,  though  not  suitable  to  the  English 
consumer,  can  find  a  market  somewhere.  As  we  are  only  supposing 
three  countries,  we  must  assume  her  to  find  this  market  in  Germany, 
and  to  pay  for  what  she  imports  from  England  by  orders  on  her 
German  customers.  Germany,  therefore,  besides  having  to  pay  for 
her  own  imports,  now  owes  a  debt  to  England  on  account  of  the  third 
country,  and  the  means  for  both  purposes  must  be  derived  from 
her  exportable  produce.  She  must  therefore  tender  that  produce  to 
England  on  terms  sufficiently  favourable  to  force  a  demand  equiva- 
lent to  this  double  debt.  Everything  will  take  place  precisely  as  if 
the  third  country  had  bought  German  produce  with  her  own  goods, 
and  offered  that  produce  to  England  in  exchange  for  hers.  There  is 
an  increased  demand  for  English  goods,  for  which  German  goods 


OF  INTERNATIONAL  VALUES  39 

have  to  furnish  the  payment ;  and  this  can  only  be  done  by  forcing 
an  increased  demand  for  them  in  England,  that  is,  by  lowering  their 
value.  Thus  an  increase  of  demand  for  a  country's  exports  in  any 
foreign  country.,  enables  her  to  obtain  more  cheaply  even  those  im- 
ports which  she  procures  from  other  quarters.  And  conversely,  an 
increase  of  her  own  demand  for  any  foreign  commodity  compels  her, 
cceteris  paribus,  to  pay  dearer  for  all  foreign  commodities. 

The  law  which  we  have  now  illustrated,  may  be  appropriately 
named,  the  Equation  of  International  Demand.  It  may  be  concisely 
stated  as  follows.  The  produce  of  a  country  exchanges  for  the 
produce  of  other  countries,  at  such  values  as  are  required  in  order 
that  the  whole  of  her  exports  may  exactly  pay  for  the  whole  of  her 
imports.  This  law  of  International  Values  is  but  an  extension  of  the 
more  general  law  of  Value,  which  we  called  the  Equation  of  Supply 
and  Demand.  We  have  seen  that  the  value  of  a  commodity  always 
so  adjusts  itself  as  to  bring  the  demand  to  the  exact  level  of  the 
supply.  But  all  trade,  either  between  nations  or  individuals,  is  an 
interchange  of  commodities,  in  which  the  things  that  they  respectively 
have  to  sell,  constitute  also  their  means  of  purchase:  the  supply 
brought  by  the  one  constitutes  his  demand  for  what  is  brought  by  the 
other.  So  that  supply  and  demand  are  but  another  expression  for 
reciprocal  demand :  and  to  say  that  value  will  adjust  itself  so  as  to 
equalize  demand  with  supply,  is  in  fact  to  say  that  it  will  adjust 
itself  so  as  to  equalize  the  demand  on  one  side  with  the  demand 
on  the  other. 

§  5.  To  trace  the  consequences  of  this  law  of  International  Values 
through  their  wide  ramifications,  would  occupy  more  space  than  can 
be  here  devoted  to  such  a  purpose.  But  there  is  one  of  its  applica- 
tions which  I  will  notice,  as  being  in  itself  not  unimportant,  as 
bearing  on  the  question  which  will  occupy  us  in  the  next  chapter, 
and  especially  as  conducing  to  the  more  full  and  clear  understanding 
of  the  law  itself. 

We  have  seen  that  the  value  at  which  a  country  purchases  a  foreign 
commodity,  does  not  conform  to  the  cost  of  production  in  the  country 
from  which  the  commodity  comes.  Suppose  now  a  change  in  that 
cost  of  production ;  an  improvement,  for  example,  in  the  process 
of  manufacture.     Will   the   benefit   of   the   improvement   be   fully 


40  MILL 

participated  in  by  other  countries?  Will  the  commodity  be  sold  as 
much  cheaper  to  foreigners,  as  it  is  produced  cheaper  at  home?  This 
question,  and  the  considerations  which  must  be  entered  into  in  order 
to  resolve  it,  are  well  adapted  to  try  the  worth  of  the  theory. 

Let  us  first  suppose,  that  the  improvement  is  of  a  nature  to  create 
a  new  branch  of  export :  to  make  foreigners  resort  to  the  country  for 
a  commodity  which  they  had  previously  produced  at  home.  On 
this  supposition,  the  foreign  demand  for  the  productions  of  the  coun- 
try is  increased ;  which  necessarily  alters  the  international  values 
to  its  advantage,  and  to  the  disadvantage  of  foreign  countries,  who, 
therefore,  though  they  participate  in  the  benefit  of  the  new  product, 
must  purchase  that  benefit  by  paying  for  all  the  other  productions 
of  the  country  at  a  dearer  rate  than  before.  How  much  dearer,  will 
depend  on  the  degree  necessary  for  re-establishing,  under  these 
new  conditions,  the  Equation  of  International  Demand.  These  conse- 
quences follow  in  a  very  obvious  manner  from  the  law  of  international 
values,  and  I  shall  not  occupy  space  in  illustrating  them,  but  shall 
pass  to  the  more  frequent  case,  of  an  improvement  which  does  not 
create  a  new  article  of  export,  but  lowers  the  cost  of  production  of 
something  which  the  country  already  exported. 

It  being  advantageous,  in  discussions  of  this  complicated  nature, 
to  employ  definite  numerical  amounts,  we  shall  return  to  our  original 
example.  Ten  yards  of  cloth,  if  produced  in  Germany,  would  require 
the  same  amount  of  labour  and  capital  as  twenty  yards  of  linen  ;  but, 
by  the  play  of  international  demand,  they  can  be  obtained  from 
England  for  seventeen.  Suppose  now,  that  by  a  mechanical  improve- 
ment made  in  Germany,  and  not  capable  of  being  transferred  to 
England,  the  same  quantity  of  labour  and  capital  which  produced 
twenty  yards  of  linen,  is  enabled  to  produce  thirty.  Linen  falls 
one-third  in  value  in  the  German  market,  as  compared  with  other 
commodities  produced  in  Germany.  Will  it  also  fall  one-third  as 
compared  with  English  cloth,  thus  giving  to  England,  in  common 
with  Germany,  the  full  benefit  of  the  improvement?  Or  (ought  we 
not  rather  to  say),  since  the  cost  to  England  of  obtaining  linen  was 
not  regulated  by  the  cost  to  Germany  of  producing  it,  and  since 
England,  accordingly,  did  not  get  the  entire  benefit  even  of  the 
twenty  yards  which  Germany  could  have  given  for  ten  yards  of 
cloth,  but  only  obtained  seventeen — why  should  she  now  obtain 


OF  INTERNATIONAL  VALUES  41 

more,  merely  because  this  theoretical  limit  is  removed  ten  degrees 
further  off  ? 

It  is  evident  that  in  the  outset,  the  improvement  will  lower  the 
value  of  linen  in  Germany,  in  relation  to  all  other  commodities  in  the 
German  market,  including,  among  the  rest,  even  the  imported  com- 
modity, cloth.  If  ID  yards  of  cloth  previously  exchanged  for  17 
yards  of  linen,  they  will  now  exchange  for  half  as  much  more,  or 
252  yards.  But  whether  they  will  continue  to  do  so,  will  depend  on 
the  effect  which  this  increased  cheapness  of  linen  produces  on  the 
international  demand.  The  demand  for  linen  in  England  could 
scarcely  fail  to  be  increased.  But  it  might  be  increased  either  in 
proportion  to  the  cheapness,  or  in  a  greater  proportion  than  the 
cheapness,  or  in  a  less  proportion. 

If  the  demand  was  increased  in  the  same  proportion  with  the 
cheapness,  England  would  take  as  many  times  253  yards  of  linen,  as 
the  number  of  times  1 7  yards  which  she  took  previously.  She  would 
expend  in  linen  exactly  as  much  of  cloth,  or  of  the  equivalents  of 
cloth,  as  much  in  short  of  the  collective  income  of  her  people,  as  she 
did  before.  Germany,  on  her  part,  would  probably  require,  at  that 
rate  of  interchange,  the  same  quantity  of  cloth  as  before,  because  it 
would  in  reality  cost  her  exactly  as  much;  253  yards  of  linen  being 
now  of  the  same  value  in  her  market,  as  17  yards  were  before.  In 
this  case,  therefore,  10  yards  of  cloth  for  25+  of  linen  is  the  rate 
of  interchange  which  under  these  new  conditions  would  restore  the 
equation  of  international  demand ;  and  England  would  obtain  linen 
one-third  cheaper  than  before,  being  the  same  advantage  as  was 
obtained  by  Germany. 

It  might  happen,  however,  that  this  great  cheapening  of  linen 
would  increase  the  demand  for  it  in  England  in  a  greater  ratio  than 
the  increase  of  cheapness ;  and  that  if  she  before  wanted  1000  times 
17  yards,  she  would  now  require  more  than  1000  times  253  yards  to 
satisfy  her  demand.  If  so,  the  equation  of  international  demand  can- 
not establish  itself  at  that  rate  of  interchange ;  to  pay  for  the  linen 
England  must  offer  cloth  on  more  advantageous  terms:  say,  for 
example,  10  yards  for  21  of  linen;  so  that  England  will  not  have 
the  full  benefit  of  the  improvement  in  the  production  of  linen,  while 
Germany,  in  addition  to  that  benefit,  will  also  pay  less  for  cloth.  But 
again,  it  is  possible  that  England  might  not  desire  to  increase  her 


42  MILL 

consumption  of  linen  in  even  so  great  a  proportion  as  that  of  the 
increased  cheapness  ;  she  might  not  desire  so  great  a  quantity  as  looo 
times  25^  yards:  and  in  that  case  Germany  must  force  a  demand, 
by  offering  more  than  25-2  yards  of  linen  for  10  of  cloth;  linen  will 
be  cheapened  in  England  in  a  still  greater  degree  than  in  Germany ; 
while  Germany  will  obtain  cloth  on  more  unfavourable  terms,  and  at 
a  higher  exchange  value  than  before. 

After  what  has  already  been  said,  it  is  not  necessary  to  particu- 
larize the  manner  in  which  these  results  might  be  modified  by  intro- 
ducing into  the  hypothesis  other  countries  and  other  commodities. 
There  is  a  further  circumstance  by  which  they  may  also  be  modified. 
In  the  case  supposed,  the  consumers  of  Germany  have  had  a  part 
of  their  incomes  set  at  liberty  by  the  increased  cheapness  of  linen, 
which  they  may  indeed  expend  in  increasing  their  consumption  of 
that  article,  but  which  they  may,  likewise,  expend  in  other  articles, 
and  among  others,  in  cloth  or  other  imported  commodities.  This 
would  be  an  additional  element  in  the  international  demand,  and 
would  modify  more  or  less  the  terms  of  interchange. 

Of  the  three  possible  varieties  in  the  influence  of  cheapness  on 
demand,  which  is  the  more  probable — that  the  demand  would  be 
increased  more  than  the  cheapness,  as  much  as  the  cheapness,  or  less 
than  the  cheapness?  This  depends  on  the  nature  of  the  particular 
commodity,  and  on  the  tastes  of  purchasers.  When  the  commodity 
is  one  in  general  request,  and  the  fall  of  its  price  brings  it  within 
the  reach  of  a  much  larger  class  of  incomes  than  before,  the  demand 
is  often  increased  in  a  greater  ratio  than  the  fall  of  price,  and  a  larger 
sum  of  money  is  on  the  whole  expended  in  the  article.  Such  was  the 
case  with  coffee,  when  its  price  was  lowered  by  successive  reductions 
of  taxation ;  and  such  would  probably  be  the  case  with  sugar,  wine, 
and  a  large  class  of  commodities  which,  though  not  necessaries,  are 
largely  consumed,  and  in  which  many  consumers  indulge  when  the 
articles  are  cheap  and  economize  when  they  are  dear.  But  it  more 
frequently  happens  that  when  a  commodity  falls  in  price,  less  money 
is  spent  in  it  than  before :  a  greater  quantity  is  consumed,  but  not 
so  great  a  value.  The  consumer  who  saves  money  by  the  cheapness 
of  the  article,  will  be  likely  to  expend  part  of  the  saving  in  increas- 
ing his  consumption  of  other  things :  and  unless  the  low  price  attracts 
a  large  class  of  new  purchasers  who  were  either  not  consumers  of  the 


OF  INTERNATIONAL  VALUES  43 

article  at  all,  or  only  in  small  quantity  and  occasionally,  a  less  aggre- 
gate sum  will  be  expended  on  it.  Speaking  generally,  therefore,  the 
third  of  our  three  cases  is  the  most  probable :  and  an  improvement 
in  an  exportable  article  is  likely  to  be  as  beneficial  (if  not  more 
beneficial)  to  foreign  countries,  as  to  the  country  where  the  article 
is  produced. 

§  9.  We  now  pass  to  another  essential  part  of  the  theory  of  the 
subject.  There  are  two  senses  in  which  a  country  obtains  commod- 
ities cheaper  by  foreign  trade  ;  in  the  sense  of  Value,  and  in  the  sense 
of  Cost.  It  gets  them  cheaper  in  the  first  sense,  by  their  falling  in 
value  relatively  to  other  things :  the  same  quantity  of  them  exchang- 
ing, in  the  country,  for  a  smaller  cjuantity  than  before  of  the  other 
produce  of  the  country.  To  revert  to  our  original  figures ;  in  Eng- 
land, all  consumers  of  linen  obtained,  after  the  trade  was  opened, 
17  or  some  greater  number  of  yards  for  the  same  quantity  of  all  other 
things  for  which  they  before  obtained  only  15.  The  degree  of  cheap- 
ness, in  this  sense  of  the  term,  depends  on  the  laws  of  International 
Demand,  so  copiously  illustrated  in  the  preceding  sections.  But  in 
the  other  sense,  that  of  Cost,  a  country  gets  a  commodity  cheaper, 
when  it  obtains  a  greater  quantity  of  the  commodity  with  the  same 
expenditure  of  labour  and  capital.  In  this  sense  of  the  term,  cheap- 
ness in  a  great  measure  depends  upon  a  cause  of  a  different  nature : 
a  country  gets  its  imports  cheaper,  in  proportion  to  the  general  pro- 
ductiveness of  its  domestic  industry ;  to  the  general  efficiency  of  its 
labour.  The  labour  of  one  country  may  be,  as  a  whole,  much  more 
efficient  than  that  of  another :  all  or  most  of  the  commodities  capable 
of  being  produced  in  both,  may  be  produced  in  one  at  less  absolute 
cost  than  in  the  other ;  which,  as  we  have  seen,  will  not  necessarily 
prevent  the  two  countries  from  exchanging  commodities.  The  things 
which  the  more  favoured  country  will  import  from  others,  are  of 
course  those  in  which  it  is  least  superior ;  but  by  importing  them  it 
acquires,  even  in  those  commodities,  the  same  advantage  which  it 
possesses  in  the  articles  it  gives  in  exchange  for  them.  Thus  the 
countries  which  obtain  their  own  productions  at  least  cost,  also  get 
their  imports  at  least  cost. 

This  will  be  made  still  more  obvious  if  we  suppose  two  competing 
countries.    England  sends  cloth  to  Germany,  and  gives  10  yards  of 


44  MILL 

it  for  17  yards  of  linen,  or  for  something  else  which  in  Germany  is 
the  equivalent  of  those  17  yards.  Another  country,  as  for  example 
France,  does  the  same.  The  one  giving  10  yards  of  cloth  for  a 
certain  quantity  of  German  commodities,  so  must  the  other  :  if,  there- 
fore, in  England,  these  10  yards  are  produced  by  only  half  as  much 
labour  as  that  by  which  they  are  produced  in  France,  the  linen  or 
other  commodities  of  Germany  will  cost  to  England  only  half  the 
amount  of  labour  which  they  will  cost  to  France.  England  would 
thus  obtain  her  imports  at  less  cost  than  France,  in  the  ratio  of  the 
greater  efficiency  of  her  labour  in  the  production  of  cloth :  which 
might  be  taken,  in  the  case  supposed,  as  an  approximate  estimate 
of  the  efficiency  of  her  labour  generally ;  since,  France,  as  well  as 
England,  by  selecting  cloth  as  her  article  of  export,  would  have  shown 
that  with  her  also  it  was  the  commodity  in  which  labour  was  rela- 
tively the  most  efficient.  It  follows,  therefore,  that  every  country- 
gets  its  imports  at  less  cost,  in  proportion  to  the  general  efficiency 
of  its  labour. 

This  proposition  was  first  clearly  seen  and  expounded  by  Mr. 
Senior,^  but  only  as  applicable  to  the  importation  of  the  precious 
metals.  I  think  it  important  to  point  out  that  the  proposition  holds 
equally  true  of  all  other  imported  commodities ;  and  further,  that 
it  is  only  a  portion  of  the  truth.  For,  in  the  case  supposed,  the  cost 
to  England  of  the  linen  which  she  pays  for  with  ten  yards  of  cloth, 
does  not  depend  solely  upon  the  cost  to  herself  of  ten  yards  of  cloth, 
but  partly  also  upon  how  many  yards  of  linen  she  obtains  in  exchange 
for  them.  What  her  imports  cost  to  her  is  a  function  of  two  variables  ; 
the  quantity  of  her  own  commodities  which  she  gives  for  them,  and 
the  cost  of  those  commodities.  Of  these,  the  last  alone  depends 
on  the  efficiency  of  her  labour :  the  first  depends  on  the  law  of  inter- 
national values ;  that  is  on  the  intensity  and  extensibility  of  the 
foreign  demand  for  her  commodities,  compared  with  her  demand  for 
foreign  commodities. 

In  the  case  just  now  supposed,  of  a  competition  between  England 
and  France,  the  state  of  international  values  affected  both  competi- 
tors alike,  since  they  were  supposed  to  trade  with  the  same  country, 
and  to  export  and  import  the  same  commodities.  The  difference, 
therefore,  in  what  their  imports  cost  them,  depended  solely  on  the 

>  Three  Lectures  on   the  Cost  of  Obtaining  Mone>-,  Lecture  I,  pp.   11-20. 


OF  THE  FOREIGN  EXCHANGES  45 

other  cause,  the  unequal  efficiency  of  their  labour.  They  gave  the 
same  quantities ;  the  difference  could  only  be  in  the  cost  of  produc- 
tion. But  if  England  traded  to  Germany  with  cloth,  and  France 
with  iron,  the  comparative  demand  in  Germany  for  those  two  com- 
modities would  bear  a  share  in  determining  the  comparative  cost,  in 
labour  and  capital,  with  which  England  and  France  would  obtain 
German  products.  If  iron  were  more  in  demand  in  Germany  than 
cloth,  France  would  recover,  through  that  channel,  part  of  her  disad- 
vantage ;  if  less,  her  disadvantage  would  be  increased.  The  effi- 
ciency, therefore,  of  a  country's  labour,  is  not  the  only  thing  which 
determines  even  the  cost  at  which  that  country  obtains  imported 
commodities — while  it  has  no  share  whatever  in  determining  either 
their  exchange  value,  or,  as  we  shall  presently  see,  their  price. 

MILL:  OF  THE  FOREIGN  EXCHANGES^ 


Money  is  sent  from  one  country  to  another  for  various  purposes : 
such  as  the  payment  of  tributes  or  subsidies ;  remittances  of  revenue 
to  or  from  dependencies,  or  of  rents  or  other  incomes  to  their  absent 
owners ;  emigration  of  capital,  or  transmission  of  it  for  foreign  in- 
vestment. The  most  usual  purpose,  however,  is  that  of  payment  for 
goods.  To  show  in  what  circumstances  money  actually  passes  from 
country  to  country  for  this  or  any  of  the  other  purposes  mentioned, 
it  is  necessary  briefly  to  state  the  nature  of  the  mechanism  by  which 
international  trade  is  carried  on,  when  it  takes  place  not  by  barter 
but  through  the  medium  of  money. 

§  2.  In  practice,  the  exports  and  imports  of  a  country  not  only 
are  not  exchanged  directly  against  each  other,  but  often  do  not  even 
pass  through  the  same  hands.  Each  is  separately  bought  and  paid 
for  with  money.  We  have  seen,  however,  that,  even  in  the  same 
country,  money  does  not  actually  pass  from  hand  to  hand  each  time 
that  purchases  are  made  with  it,  and  still  less  does  this  happen  be- 
tween different  countries.  The  habitual  mode  of  paying  and  receiving 
payment  for  commodities,  between  country  and  country,  is  by  bills 
of  exchange. 

iMill,  Principles,  Bk.  Ill,  chap.  xx. 


46  MILL 

A  merchant  in  England,  A,  has  exported  English  commodities, 
consigning  them  to  his  correspondent  B  in  France.  Another  mer- 
chant in  France,  C,  has  exported  French  commodities,  suppose  of 
equivalent  value,  to  a  merchant  D  in  England.  It  is  evidently  un- 
necessary that  B  in  France  should  send  money  to  A  in  England,  and 
that  D  in  England  should  send  an  equal  sum  of  money  to  C  in  France. 
The  one  debt  may  be  applied  to  the  payment  of  the  other,  and  the 
double  cost  and  risk  of  carriage  be  thus  saved.  A  draws  a  bill  on  B 
for  the  amount  which  B  owes  to  him :  D,  having  an  equal  amount  to 
pay  in  France,  buys  this  bill  from  A,  and  sends  it  to  C,  who,  at 
the  expiration  of  the  number  of  days  which  the  bill  has  to  run, 
presents  it  to  B  for  payment.  Thus  the  debt  due  from  France  to 
England,  and  the  debt  due  from  England  to  France,  are  both  paid 
without  sending  an  ounce  of  gold  or  silver  from  one  country  to 
the  other. 

In  this  statement,  however,  it  is  supposed,  that  the  sum  of  the 
debts  due  from  France  to  England,  and  the  sum  of  those  due  from 
England  to  France,  are  equal ;  that  each  country  has  exactly  the 
same  number  of  ounces  of  gold  or  silver  to  pay  and  to  receive.  This 
implies,  (if  we  exclude  for  the  present  any  other  international  pay- 
ments than  those  occurring  in  the  course  of  commerce,)  that  the 
exports  and  imports  exactly  pay  for  one  another,  or  in  other  words, 
that  the  equation  of  international  demand  is  established.  When 
such  is  the  fact,  the  international  transactions  are  liquidated  with- 
out the  passage  of  any  money  from  one  country  to  the  other.  But 
if  there  is  a  greater  sum  due  from  England  to  France,  than  is  due 
from  France  to  England,  or  vice  versa,  the  debts  cannot  be  simply 
written  off  against  one  another.  After  the  one  has  been  applied,  as 
far  as  it  will  go,  towards  covering  the  other,  the  balance  must  be 
transmitted  in  the  precious  metals.  In  point  of  fact,  the  merchant 
who  has  the  amount  to  pay,  will  even  then  pay  for  it  by  a  bill. 
When  a  person  has  a  remittance  to  make  to  a  foreign  country,  he 
does  not  himself  search  for  someone  who  has  money  to  receive  from 
that  country,  and  ask  him  for  a  bill  of  exchange.  In  this  as  in 
other  branches  of  business,  there  is  a  class  of  middlemen  or  brokers, 
who  bring  buyers  and  sellers  together,  or  stand  between  tliem,  buy- 
ing bills  from  those  who  have  money  to  receive,  and  selling  bills  to 
those  who  have  money  to  [)ay.    When  a  customer  comes  to  a  broker 


OF  THE  FOREIGN  EXCHANGES  47 

for  a  bill  on  Paris  or  Amsterdam,  the  broker  sells  to  him,  perhaps 
the  bill  he  may  himself  have  bought  that  morning  from  a  merchant, 
perhaps  a  bill  on  his  own  correspondent  in  the  foreign  city :  and  to 
enable  his  correspondent  to  pay,  when  due,  all  the  bills  he  has 
granted,  he  remits  to  him  all  those  which  he  has  bought  and  has  not 
resold.  In  this  manner  these  brokers  take  upon  themselves  the 
whole  settlement  of  the  pecuniary  transactions  between  distant 
places,  being  remunerated  by  a  small  commission  or  percentage 
on  the  amount  of  each  bill  which  they  either  sell  or  buy.  Now, 
if  the  brokers  lind  that  they  are  asked  for  bills  on  the  one  part,  to 
a  greater  amount  than  bills  are  offered  to  them  on  the  other,  they 
do  not  on  this  account  refuse  to  give  them ;  but  since,  in  that  case, 
they  have  no  means  of  enabling  the  correspondents  on  whom  their 
bills  are  drawn,  to  pay  them  when  due,  except  by  transmitting 
part  of  the  amount  in  gold  or  silver,  they  require  from  those  to 
whom  they  sell  bills  an  additional  price,  sufficient  to  cover  the  freight 
and  insurance  of  the  gold  and  silver,  with  a  profit  sufficient  to  com- 
pensate them  for  their  trouble  and  for  the  temporary  occupation  of 
a  portion  of  their  capital.  This  premium  (as  it  is  called)  the  buy- 
ers are  willing  to  pay,  because  they  must  otherwise  go  to  the  expense 
of  remitting  the  precious  metals  themselves,  and  it  is  done  cheaper 
by  those  who  make  doing  it  a  part  of  their  especial  business.  But 
though  only  some  of  those  who  have  a  debt  to  pay  would  have 
actually  to  remit  money,  all  will  be  obliged,  by  each  other's  com- 
petition, to  pay  the  premium ;  and  the  brokers  are  for  the  same 
reason  obliged  to  pay  it  to  those  whose  bills  they  buy.  The  re- 
verse of  all  this  happens,  if  on  the  comparison  of  exports  and 
imports,  the  country,  instead  of  having  a  balance  to  pay,  has  a 
balance  to  receive.  The  brokers  find  more  bills  offered  to  them, 
than  are  sufficient  to  cover  those  which  they  are  required  to  grant. 
Bills  on  foreign  countries  consequently  fall  to  a  discount ;  and 
the  competition  among  the  brokers,  which  is  exceedingly  active, 
prevents  them  from  retaining  this  discount  as  a  profit  for  them- 
selves, and  obliges  them  to  give  the  benefit  of  it  to  those  who  buy 
the   bills   for  purposes   of   remittance. 

Let  us  suppose  that  all  countries  had  the  same  currency,  as  in 
the  progress  of  political  improvement  they  one  day  will  have :  and, 
as  the  most  familiar  to   the   reader,  though  not   the  best,   let   us 


48  MILL 

suppose  this  currency  to  be  the  EngHsh.  When  England  had  the 
same  number  of  pounds  sterling  to  pay  to  France,  which  France  had 
to  pay  to  her,  one  set  of  merchants  in  England  would  want  bills,  and 
another  set  would  have  bills  to  dispose  of,  for  the  very  same  number 
of  pounds  sterling  ;  and  consequently  a  bill  on  France  for  loo^.  would 
sell  for  exactly  loo^.,  or,  in  the  phraseology  of  merchants,  the  ex- 
change would  be  at  par.  As  France  also,  on  this  supposition,  would 
have  an  equal  number  of  pounds  sterling  to  pay  and  to  receive,  bills 
on  England  would  be  at  par  in  France,  whenever  bills  on  France 
were  at  par  in  England. 

If,  however,  England  had  a  larger  sum  to  pay  to  France  than 
to  receive  from  her,  there  would  be  persons  requiring  bills  on 
France  for  a  greater  number  of  pounds  sterling  than  there  were 
bills  drawn  by  persons  to  whom  money  was  due.  A  bill  on  France 
for  lool.  would  then  sell  for  more  than  loo^.,  and  bills  would  be  said 
to  be  at  a  premium.  The  premium,  however,  could  not  exceed  the 
cost  and  risk  of  making  the  remittance  in  gold,  together  with  a  trifling 
profit ;  because  if  it  did,  the  debtor  would  send  the  gold  itself,  in 
preference  to  buying  the  bill. 

If,  on  the  contrary,  England  had  more  money  to  receive  from 
France  than  to  pay,  there  would  be  bills  offered  for  a  greater 
number  of  pounds  than  were  wanted  for  remittance,  and  the  price 
of  bills  would  fall  below  par:  a  bill  for  lool.  might  be  bought  for 
somewhat  less  than  loo/.,  and  bills  would  be  said  to  be  at  a  discount. 

When  England  has  more  to  pay  than  to  receive,  France  has  more 
to  receive  than  to  pay,  and  vice  versa.  When,  therefore,  in  England, 
bills  on  France  bear  a  premium,  then,  in  France,  bills  on  England 
are  at  a  discount :  and  when  bills  on  France  are  at  a  discount  in 
England,  bills  on  England  are  at  a  premium  in  France.  If  they  are 
at  par  in  either  country,  they  are  so,  as  we  have  already  seen,  in 
both. 

Thus  do  matters  stand  between  countries,  or  places,  which  have 
the  same  currency.  So  much  of  barbarism,  however,  still  remains 
in  the  transactions  of  the  most  civilized  nations,  that  almost  all 
independent  countries  choose  to  assert  their  nationality  by  having, 
to  their  own  inconvenience  and  that  of  their  neighbours,  a  peculiar 
currency  of  their  own.  To  our  present  jjurpose  this  makes  no 
other  difference,  than  that  instead  of  speaking  of  equal  sums  of 


OF  THE  FOREIGN  EXCHANGES  49 

money,  we  have  to  speak  of  equivalent  sums.  By  equivalent  sums, 
when  both  currencies  are  composed  of  the  same  metal,  are  meant 
sums  which  contain  exactly  the  same  quantity  of  the  metal,  in 
weight  and  fineness ;  but  when,  as  in  the  case  of  France  and 
England,  the  metals  are  different,  what  is  meant  is  that  the  quantity 
of  gold  in  the  one  sum,  and  the  quantity  of  silver  in  the  other,  are 
of  the  same  value  in  the  general  market  of  the  world :  there  being 
no  material  difference  between  one  place  and  another  in  the  relative 
value  of  these  metals.  Suppose  25  francs  to  be  (as  within  a  trifling 
fraction  it  is)  the  equivalent  of  a  pound  sterling.  The  debts  and 
credits  of  the  two  countries  would  be  equal,  when  .the  one  owed  as 
many  times  25  francs,  as  the  other  owed  pounds.  When  this  was 
the  case,  a  bill  on  France  for  2  500  francs  would  be  worth  in  England 
100/.,  and  a  bill  on  England  for  100/.  would  be  worth  in  France  2500 
francs.  The  exchange  is  then  said  to  be  at  par:  and  25  francs  (in 
reality  25  francs  and  a  triile  more)^  is  called  the  par  of  exchange 
with  France.  When  England  owed  to  France  more  than  the  equiva- 
lent of  what  France  owed  to  her,  a  bill  for  2500  francs  would  be 
at  a  premium,  that  is  would  be  worth  more  than  100/.  When 
France  owed  to  England  more  than  the  equivalent  of  what  England 
owed  to  France,  a  bill  for  2500  francs  would  be  worth  less  than 
100/.,  or  would  be  at  a  discount. 

When  bills  on  foreign  countries  are  at  a  premium,  it  is  cus- 
tomary to  say  that  the  exchanges  are  against  the  country,  or  un- 
favourable to  it.  In  order  to  understand  these  phrases,  we  must  take 
notice  of  what  "the  exchange"  in  the  language  of  merchants,  really 
means.  It  means  the  power  which  the  money  of  the  country  has  of 
purchasing  the  money  of  other  countries.  Supposing  25  francs  to 
be  the  exact  par  of  exchange,  then  when  it  requires  more  than  100/. 
to  buy  a  bill  for  2500  francs,  lOoZ.  of  English  money  are  worth  less 
than  their  real  equivalent  of  French  money :  and  this  is  called,  an 
exchange  unfavourable  to  England.  The  only  persons  in  England, 
however,  to  whom  it  is  really  unfavourable,  are  those  who  have 
money  to  pay  in  France ;    for  they  come  into  the  bill  market  as 

1  Written  before  the  change  in  the  relative  value  of  the  two  metals  pro- 
duced by  the  gold  discoveries.  The  par  of  exchange  between  gold  and  silver 
currencies  is  now  [1S62]  variable,  and  no  one  can  foresee  at  what  point  it  will 
ultimately  rest. 


50  MILL 

buyers,  and  have  to  pay  a  premium ;  but  to  those  who  have  money 
to  receive  in  France,  the  same  state  of  things  is  favourable ;  for  they 
come  as  sellers  and  receive  the  premium.  The  premium,  however, 
indicates  that  a  balance  is  due  by  England,  which  must  be  eventu- 
ally liquidated  in  the  precious  metals :  and  since,  according  to  the 
old  theory,  the  benefit  of  a  trade  consisted  in  bringing  money  into 
the  country,  this  prejudice  introduced  the  practice  of  calling  the  ex- 
change favourable  when  it  indicated  a  balance  to  receive,  and  un- 
favourable when  it  indicated  one  to  pay:  and  the  phrases  in  turn 
tended  to  maintain  the  prejudice. 

§  3.  It  might  be  supposed  at  first  sight  that  when  the  exchange 
is  unfavourable,  or  in  other  words,  when  bills  are  at  a  premium,  the 
premium  must  always  amount  to  a  full  equivalent  for  the  cost  of 
transmitting  money :  since,  as  there  is  really  a  balance  to  pay,  and 
as  the  full  cost  must  therefore  be  incurred  by  some  of  those  who 
have  remittances  to  make,  their  competition  will  compel  all  to  sub- 
mit to  an  equivalent  sacrifice.  And  such  would  certainly  be  the  case, 
if  it  were  always  necessary  that  whatever  is  destined  to  be  paid 
should  be  paid  immediately.  The  expectation  of  great  and  imme- 
diate foreign  payments  sometimes  produces  a  most  startling  effect 
on  the  exchanges.^  But  a  small  excess  of  imports  above  exports,  or 
any  other  small  amount  of  debt  to  be  paid  to  foreign  countries,  does 
not  usually  affect  the  exchanges  to  the  full  extent  of  the  cost  and 
risk  of  transporting  bullion.  The  length  of  credit  allowed,  generally 
permits,  on  the  part  of  some  of  the  debtors,  a  postponement  of  pay- 
ment, and  in  the  mean  time  the  balance  may  turn  the  other  way,  and 

1  On  the  news  of  Bonaparte's  landinp;  from  Elba,  the  price  of  bills  advanced 
in  one  day  as  much  as  ten  per  cent.  Of  course  this  premium  was  not  a  mere 
equivalent  for  cost  of  carriage,  since  the  freight  of  such  an  article  as  gold,  even 
with  the  addition  of  war  insurance,  could  never  have  amounted  to  so  much. 
This  great  price  was  an  ec[uivalcnt  not  for  the  difficulty  of  sending  gold,  but  for 
the  anticipated  difficulty  of  procuring  it  to  send  ;  the  expectation  being  that 
there  would  be  such  immense  remittances  to  the  Continent  in  subsidies  and  for 
the  support  of  armies,  as  would  press  hard  on  the  stock  of  bullion  in  the  coun- 
try (which  was  then  entirely  denuded  of  specie),  and  this,  too,  in  a  shorter  time 
than  would  allow  of  its  being  replenished.  Accordingly  the  price  of  bullion 
rose  likewise,  with  the  same  suddenness.  It  is  hardly  necessary  to  say  that  this 
took  place  during  the  Bank  restriction  [i 707-1810! .  In  a  convertible  state  of  the 
currency,  no  such  thing  could  have  occurred  until  the  Bank  stopped  payment. 


OF  THE  FOREIGN  EXCHANGES  51 

restore  the  equality  of  debts  and  credits  without  any  actual  trans- 
mission of  the  metals.  And  this  is  the  more  likely  to  happen,  as  there 
is  a  self-adjusting  power  in  the  variations  of  the  exchange  itself. 
Bills  are  at  a  premium  because  a  greater  money  value  has  been  im- 
ported than  exported.  But  the  premium  is  itself  an  extra  profit  to 
those  who  export.  Besides  the  price  they  obtain  for  their  goods, 
they  draw  for  the  amount  and  gain  the  premium.  It  is,  on  the 
other  hand,  a  diminution  of  profit  to  those  who  import.  Besides  the 
price  of  the  goods,  they  have  to  pay  a  premium  for  remittance.  So 
that  what  is  called  an  unfavourable  exchange  is  an  encouragement 
to  export,  and  a  discouragement  to  import.  And  if  the  balance  due 
is  of  small  amount,  and  is  the  consequence  of  some  merely  casual 
disturbance  in  the  ordinary  course  of  trade,  it  is  soon  liquidated  in 
commodities,  and  the  account  adjusted  by  means  of  bills,  without 
the  transmission  of  any  bullion.  Not  so,  however,  when  the  excess 
of  imports  above  exports,  which  has  made  the  exchange  unfavour- 
able, arises  from  a  permanent  cause.  In  that  case,  what  disturbed 
the  equilibrium  must  have  been  the  state  of  prices,  and  it  can  only 
be  restored  by  acting  on  prices.  It  is  impossible  that  prices  should 
be  such  as  to  invite  to  an  excess  of  imports,  and  yet  that  the  exports 
should  be  kept  permanently  up  to  the  imports  by  the  extra  profit 
on  exportation  derived  from  the  premium  on  bills ;  for  if  the  exports 
were  kept  up  to  the  imports,  bills  would  not  be  at  a  premium,  and 
the  extra  profit  would  not  exist.  It  is  through  the  prices  of  com- 
modities that  the  correction  must  be  administered. 

Disturbances,  therefore,  of  the  equilibrium  of  imports  and  ex- 
ports, and  consequent  disturbances  of  the  exchange,  may  be  con- 
sidered as  of  two  classes ;  the  one  casual  or  accidental,  which,  if 
not  on  too  large  a  scale,  correct  themselves  through  the  premium  on 
bills,  without  any  transmission  of  the  precious  metals ;  the  other 
arising  from  the  general  state  of  prices,  which  cannot  be  corrected 
without  the  subtraction  of  actual  money  from  the  circulation  of  one 
of  the  countries,  or  an  annihilation  of  credit  equivalent  to  it ;  since 
the  mere  transmission  of  bullion  (as  distinguished  from  money),  not 
having  any  effect  on  prices,  is  of  no  avail  to  abate  the  cause  from 
which   the   disturbance   proceeded. 

It  remains  to  observe,  that  the  exchanges  do  not  depend  on  the 
balance  of  debts  and  credits  with  each  country  separately,  but  with 


52  MILL 

all  countries  taken  together.  England  may  owe  a  balance  of  pay- 
ments to  France ;  but  it  does  not  follow  that  the  exchange  with 
France  will  be  against  England,  and  that  bills  on  France  will  be  at 
a  premium ;  because  a  balance  may  be  due  to  England  from  Holland 
or  Hamburg,  and  she  may  pay  her  debts  to  France  with  bills  of 
those  places ;  which  is  technically  called  arbitration  of  exchange. 
There  is  some  little  additional  expense,  partly  commission  and  partly 
loss  of  interest  in  settling  debts  in  this  circuitous  manner,  and  to 
the  extent  of  that  small  difference  the  exchange  with  one  country 
may  vary  apart  from  that  with  others ;  but  in  the  main,  the  ex- 
changes with  all  foreign  countries  vary  together,  according  as  the 
country  has  a  balance  to  receive  or  to  pay  on  the  general  result  of 
its  foreign  transactions. 


MILL:  OF  THE  DISTRIBUTION  OF  THE  PRECIOUS 
METALS  THROUGH  THE  COMMERCIAL  WORLD  ^ 

§  I.  Having  now  examined  the  mechanism  by  which  the  commer- 
cial transactions  between  nations  are  actually  conducted,  we  have 
next  to  inquire  whether  this  mode  of  conducting  them  makes  any 
difference  in  the  conclusions  respecting  international  values,  which 
we  previously  arrived  at  on  the  hypothesis  of  barter. 

The  nearest  analogy  would  lead  us  to  presume  the  negative.  We 
did  not  find  that  the  intervention  of  money  and  its  substitutes  made 
any  difference  in  the  law  of  value  as  applied  to  adjacent  places. 
Things  which  would  have  been  equal  in  value  if  the  mode  of  ex- 
change had  been  by  barter,  are  worth  equal  sums  of  money.  The 
introduction  of  money  is  a  mere  addition  of  one  more  commodity, 
of  which  the  value  is  regulated  by  the  same  laws  as  that  of  all 
other  commodities.  We  shall  not  be  surprised,  therefore,  if  we  find 
that  international  values  also  are  determined  by  the  same  causes 
under  a  money  and  bill  system,  as  they  would  be  under  a  system  of 
barter ;  and  that  money  has  little  to  do  in  the  matter,  except  to 
furnish  a  convenient  mode  of  comparing  values. 

All  interchange  is,  in  substance  and  effect,  barter :  whoever  sells 
commodities  for  money,  and  with  that  money  buys  other  goods, 

iMill,  Principles,  Bk.  Ill,  chap.  xxi. 


DISTRIBUTION  OF  THE  PRECIOUS  METALS  53 

really  buys  those  goods  with  his  own  commodities.  And  so  of 
nations :  their  trade  is  a  mere  exchange  of  exports  for  imports ;  and 
whether  money  is  employed  or  not,  things  are  only  in  their  perma- 
nent state  when  the  exports  and  imports  exactly  pay  for  each  other. 
When  this  is  the  case,  equal  sums  of  money  are  due  from  each 
country  to  the  other,  the  debts  are  settled  by  bills,  and  there  is 
no  balance  to  be  paid  in  the  precious  metals.  The  trade  is  in  a 
state  like  that  which  is  called  in  mechanics  a  condition  of  stable 
equilibrium. 

But  the  process  by  which  things  are  brought  back  to  this  state 
when  they  happen  to  deviate  from  it,  is,  at  least  outwardly,  not  the 
same  in  a  barter  system  and  in  a  money  system.  Under  the  first, 
the  country  which  wants  more  imports  than  its  exports  will  pay  for, 
must  offer  its  exports  at  a  cheaper  rate,  as  the  sole  means  of  creating 
a  demand  for  them  sufficient  to  re-establish  the  equilibrium.  When 
money  is  used,  the  country  seems  to  do  a  thing  totally  different. 
She  takes  the  additional  imports  at  the  same  price  as  before,  and 
as  she  exports  no  equivalent,  the  balance  of  payments  turns  against 
her ;  the  exchange  becomes  unfavourable,  and  the  difference  has  to 
be  paid  in  money.  This  is  in  appearance  a  very  distinct  operation 
from  the  former.  Let  us  see  if  it  differs  in  its  essence,  or  only  in  its 
mechanism. 

Let  the  country  which  has  the  balance  to  pay  be  England,  and 
the  country  which  receives  it,  France.  By  this  transmission  of  the 
precious  metals,  the  quantity  of  the  currency  is  diminished  in  Eng- 
land, and  increased  in  France.  This  I  am  at  liberty  to  assume. 
As  we  shall  see  hereafter,  it  would  be  a  very  erroneous  assumption  if 
made  in  regard  to  all  payments  of  international  balances.  A  balance 
which  has  only  to  be  paid  once,  such  as  the  payment  made  for  an 
extra  importation  of  corn  in  a  season  of  dearth,  may  be  paid  from 
hoards,  or  from  the  reserves  of  bankers,  without  acting  on  the  cir- 
culation. But  we  are  now  supposing  that  there  is  an  excess  of 
imports  over  exports,  arising  from  the  fact  that  the  equation  of 
international  demand  is  not  yet  established :  that  there  is  at  the 
ordinary  prices  a  permanent  demand  in  England  for  more  French 
goods  than  the  English  goods  required  in  France  at  the  ordinary 
prices  will  pay  for.  When  this  is  the  case,  if  a  change  were  not  made 
in  the  prices,  there  would  be  a  perpetually  renewed  balance  to  be 


54  MILL 

paid  in  money.  The  imports  require  to  be  permanently  diminished,  or 
the  exports  to  be  increased  ;  which  can  only  be  accomplished  through 
prices ;  and  hence,  even  if  the  balances  are  at  first  paid  from  hoards, 
or  by  the  exportation  of  bullion,  they  will  reach  the  circulation  at 
last,  for  until  they  do,  nothing  can  stop  the  drain. 

When,  therefore,  the  state  of  prices  is  such  that  the  equation 
of  international  demand  cannot  establish  itself,  the  country  requir- 
ing more  imports  than  can  be  paid  for  by  the  exports ;  it  is  a  sign 
that  the  country  has  more  of  the  precious  metals  or  their  substi- 
tutes, in  circulation,  than  can  permanently  circulate,  and  must 
necessarily  part  with  some  of  them  before  the  balance  can  be  re- 
stored. The  currency  is  accordingly  contracted :  prices  fall,  and 
among  the  rest,  the  prices  of  exportable  articles ;  for  which  accord- 
ingly, there  arises,  in  foreign  countries,  a  greater  demand :  while 
imported  commodities  have  possibly  risen  in  price,  from  the  influx 
of  money  into  foreign  countries,  and  at  all  events  have  not  partici- 
pated in  the  general  fall.  But  until  the  increased  cheapness  of  Eng- 
lish goods  induces  foreign  countries  to  take  a  greater  pecuniary 
value,  or  until  the  increased  dearness  (positive  or  comparative)  of 
foreign  goods  makes  England  take  a  less  pecuniary  value,  the  exports 
of  England  will  be  no  nearer  to  paying  for  the  imports  than  before, 
and  the  stream  of  the  precious  metals  which  had  begun  to  flow  out 
of  England,  will  still  flow  on.  This  efflux  will  continue,  until  the  fall 
of  prices  in  England  brings  within  reach  of  the  foreign  market  some 
commodity  which  England  did  not  previously  send  thither ;  or  until 
the  reduced  price  of  the  things  which  she  did  send,  has  forced  a 
demand  abroad  for  a  sufficient  quantity  to  pay  for  the  imports, 
aided,  perhaps,  by  a  reduction  of  the  English  demand  for  foreign 
goods,  through  their  enhanced  price,  either  positive  or  comparative. 

Now  this  is  the  very  process  which  took  place  on  our  original 
supposition  of  barter.  Not  only,  therefore,  does  the  trade  between 
nations  tend  to  the  same  equilibrium  between  exports  and  imports, 
whether  money  is  employed  or  not,  but  the  means  by  which  this 
equilibrium  is  established  are  essentially  the  same.  The  country 
whose  exports  are  not  sufficient  to  pay  for  her  imports,  offers  them 
on  cheaper  terms,  until  she  succeeds  in  forcing  the  necessary  de- 
mand :  in  other  words,  the  Equation  of  International  Demand, 
under  a  money  system  as  well  as  under  a  barter  system,  is  the 


DISTRIBUTION  OF  THE  PRECIOUS  METALS  55 

law  of  international  trade.  Every  country  exports  and  imports 
the  very  same  things,  and  in  the  very  same  quantity,  under  the  one 
system  as  under  the  other.  In  a  barter  system,  the  trade  gravitates 
to  the  point  at  which  the  sum  of  the  imports  exactly  exchanges  for 
the  sum  of  the  exports :  in  a  money  system,  it  gravitates  to  the 
point  at  which  the  sum  of  the  imports  and  the  sum  of  the  exports 
exchange  for  the  same  quantity  of  money.  And  since  things  which 
are  equal  to  the  same  thing  are  equal  to  one  another,  the  exports 
and  imports  which  are  equal  in  money  price,  would,  if  money  were 
not  used,  precisely  exchange  for  one  another.^ 


iThe  subjoined  extract  from  the  separate  Essay  previously  referred  to,  will 
give  some  assistance  in  following  the  course  of  the  phenomena.  It  is  adapted 
to  the  imaginary  case  used  for  illustration  throughout  that  Essay,  the  case  of  a 
trade  between  England  and  Germany  in  cloth  and  linen. 

"We  may,  at  first,  make  whatever  supposition  we  will  with  respect  to  the 
value  of  money.  Let  us  suppose,  therefore,  that  before  the  opening  of  the 
trade,  the  price  of  cloth  is  the  same  in  both  countries,  namely,  six  shillings  per 
yard.  As  ten  yards  of  cloth  were  supposed  to  exchange  in  England  for  fifteen 
yards  of  linen,  in  Germany  for  twenty,  we  must  suppose  that  linen  is  sold  in 
England  at  four  shillings  per  yard,  in  Germany  at  three.  Cost  of  carriage  and 
importer's  profit  are  left,  as  before,  out  of  consideration. 

"In  this  state  of  prices,  cloth,  it  is  evident,  cannot  yet  be  exported  from 
England  into  Germany:  but  linen  can  be  imported  from  Germany  into  England. 
It  will  be  so;  and,  in  the  first  instance,  the  linen  will  be  paid  for  in  money. 

"The  efflux  of  money  from  England,  and  its  influx  into  Germany,  will  raise 
money  prices  in  the  latter  country,  and  lower  them  in  the  former.  Linen  will 
rise  in  Germany  above  three  shillings  per  yard,  and  cloth  above  six  shillings. 
Linen  in  England,  being  imported  from  Germany,  will  (since  cost  of  carriage  is 
not  reckoned)  sink  to  the  same  price  as  in  that  country,  while  cloth  will  fall 
below  six  shillings.  As  soon  as  the  price  of  cloth  is  lower  in  England  than  in 
Germany,  it  will  begin  to  be  exported,  and  the  price  of  cloth  in  Germany  will 
fall  to  what  it  is  in  England.  As  long  as  the  cloth  exported  does  not  suffice  to 
pay  for  the  linen  imported,  money  will  continue  to  flow  from  England  into 
Germany,  and  prices  generally  will  continue  to  fall  in  England  and  rise  in  Ger- 
many. By  the  fall,  however,  of  cloth  in  England,  cloth  will  fall  in  Germany 
also,  and  the  demand  for  it  will  increase.  By  the  rise  of  linen  in  Germany, 
linen  must  rise  in  England  also,  and  the  demand  for  it  will  diminish.  As  cloth 
fell  in  price  and  linen  rose,  there  would  be  some  particular  price  of  both 
articles  at  which  the  cloth  exported  and  the  linen  imported  would  exactly  pay 
for  each  other.  At  this  point  prices  would  remain,  because  money  would  then 
cease  to  move  out  of  England  into  Germany.  What  this  point  might  be,  would 
entirely  depend  upon  the  circumstances  and  inclinations  of  the  purchasers  on 
both  sides.  If  the  fall  of  cloth  did  not  much  increase  the  demand  for  it  in 
Germany,  and  the  rise  of  linen  did  not  diminish  very  rapidly  the  demand  for  it 


56  MILL 

§  2.  It  thus  appears  that  the  law  of  international  values;  and, 
consequently,  the  division  of  the  advantages  of  trade,  among  the 
nations  which  carry  it  on,  are  the  same,  on  the  supposition  of  money, 
as  they  would  be  in  a  state  of  barter.  In  international,  as  in 
ordinary  domestic  interchanges,  money  is  to  commerce  only  what 
oil  is  to  machinery,  or  railways  to  locomotion,  a  contrivance  to 
diminish  friction.  In  order  still  further  to  test  these  conclusions,  let 
us  proceed  to  re-examine,  on  the  supposition  of  money,  a  question 
which  we  have  already  investigated  on  the  hypothesis  of  barter, 
namely,  to  what  extent  the  benefit  of  an  improvement  in  the  pro- 
duction of  an  exportable  article,  is  participated  in  by  the  countries 
importing  it. 

The  improvement  may  either  consist  in  the  cheapening  of  some 
article  which  was  already  a  staple  production  of  the  country,  or  in 
the  establishment   of   some  new   branch   of   industry,   or   of  some 

in  England,  much  money  must  pass  before  the  equilibrium  is  restored;  cloth 
would  fall  very  much,  and  linen  would  rise,  until  England,  perhaps,  had  to 
pay  nearly  as  much  for  it  as  when  she  produced  it  for  herself.  But  if,  on  the 
contrary,  the  fall  of  cloth  caused  a  very  rapid  increase  of  the  demand  for  it  in 
Germany,  and  the  rise  of  linen  in  Germany  reduced  very  rapidly  the  demand 
in  England  from  what  it  was  under  the  influence  of  the  first  cheapness  pro- 
duced by  the  opening  of  the  trade ;  the  cloth  would  very  soon  suffice  to  pay  for 
the  linen,  little  money  would  pass  between  the  two  countries,  and  England 
would  derive  a  large  portion  of  the  benefit  of  the  trade.  We  have  thus  arrived 
at  precisely  the  same  conclusion,  in  supposuig  the  employment  of  money, 
which  we  found  to  hold  under  the  supposition  of  barter. 

"  In  what  shape  the  benefit  accrues  to  the  two  nations  from  the  trade  is 
clear  enough.  Germany,  before  the  commencement  of  the  trade,  paid  six 
shillings  per  yard  for  broadcloth:  she  now  obtains  it  at  a  lower  price.  This, 
however,  is  not  the  whole  of  her  advantage.  As  the  money-prices  of  all  her 
other  commodities  have  risen,  the  money-incomes  of  all  her  producers  have 
increased.  This  is  no  advantage  to  them  in  buying  from  each  other,  because 
the  price  of  what  they  buy  has  risen  in  the  same  ratio  with  their  means  of 
paying  for  it:  but  it  is  an  advantage  to  them  in  buying  anything  which  has  not 
risen,  and,  still  more,  anything  which  has  fallen.  They,  therefore,  benefit  as  con- 
sumers of  cloth,  not  merely  to  the  extent  to  which  cloth  has  fallen,  but  also 
to  the  extent  to  which  other  prices  have  risen.  Suppose  that  this  is  one-tenth. 
The  same  proportion  of  their  money-incomes  as  before,  will  suffice  to  supply 
their  other  wants;  and  the  remainder,  being  increased  one-tenth  in  amount, 
will  enable  them  to  purchase  one-tenth  more  cloth  than  before,  even  though 
cloth  had  not  fallen:  but  it  has  fallen;  so  that  they  are  doubly  gainers.  They 
purchase  the  same  quantity  with  less  money,  and  have  more  to  expend  upon 
their  other  wants. 


DISTRIBUTION  OF  THE  PRECIOUS  METALS         57 

process  rendering  an  article  exportable  which  had  not  till  then  been 
exported  at  all.  It  will  be  convenient  to  begin  with  the  case  of  a 
new  export,  as  being  somewhat  the  simpler  of  the  two. 

The  first  effect  is  that  the  article  falls  in  price,  and  a  demand 
arises  for  it  abroad.  This  new  exportation  disturbs  the  balance, 
turns  the  exchanges,  money  flows  into  the  country  (which  we  shall 
suppose  to  be  England),  and  continues  to  flow  until  prices  rise. 
This  higher  range  of  prices  will  somewhat  check  the  demand  in 
foreign  countries  for  the  new  article  of  export ;  and  will  diminish 
the  demand  which  existed  abroad  for  the  other  things  which  Eng- 
land was  in  the  habit  of  exporting.  The  exports  will  thus  be 
diminished ;  while  at  the  same  time  the  English  public,  having 
more  money,  will  have  a  greater  power  of  purchasing  foreign  com- 
modities.    If  they  make  use  of  this  increased  power  of  purchase, 

"In  England,  on  the  contrary,  general  money-prices  have  fallen.  Linen, 
however,  has  fallen  more  than  the  rest,  having  been  lowered  in  price  by  im- 
portation from  a  country  where  it  was  cheaper;  whereas  the  others  have  fallen 
only  from  the  consequent  efflux  of  money.  Notwithstanding,  therefore,  the 
general  fall  of  money-prices,  the  English  producers  will  be  exactly  as  they  were 
in  all  other  respects,  while  they  will  gain  as  purchasers  of  linen. 

"The  greater  the  efflux  of  money  required  to  restore  the  equilibrium,  the 
greater  will  be  the  gain  of  Germany,  both  by  the  fall  of  cloth  and  by  the  rise 
of  her  general  prices.  The  less  the  efflux  of  money  requisite,  the  greater  will  be 
the  gain  of  England ;  because  the  price  of  linen  will  continue  lower,  and  her 
general  prices  will  not  be  reduced  so  much.  It  must  not,  however,  be  imagined 
that  high  money-prices  are  a  good,  and  low  money-prices  an  evil,  in  them- 
selves. But  the  higher  the  general  money-prices  in  any  country,  the  greater 
will  be  that  country's  means  of  purchasing  those  commodities,  which,  being 
imported  from  abroad,  are  independent  of  the  causes  which  keep  prices  high 
at  home." 

In  practice,  the  cloth  and  the  linen  would  not,  as  here  supposed,  be  at  the 
same  price  in  England  and  in  Germany:  each  would  be  dearer  in  money-price 
in  the  country  which  imported  than  in  that  which  produced  it,  by  the  amount 
of  the  cost  of  carriage,  together  with  the  ordinary  profit  on  the  importer's 
capital  for  the  average  length  of  time  which  elapsed  before  the  commodity 
could  be  disposed  of.  But  it  does  not  follow  that  each  country  pays  the  cost 
of  carriage  of  the  commodity  it  imports;  for  the  addition  of  this  item  to  the 
price  may  operate  as  a  greater  check  to  demand  on  one  side  than  on  the 
other;  and  the  equation  of  international  demand,  and  consequent  equilibrium 
of  payments,  may  not  be  maintained.  Money  would  then  flow  out  of  one  coun- 
try into  the  other,  until,  in  the  manner  already  illustrated,  the  equilibrium  was 
restored  :  and,  when  this  was  effected,  one  country  would  be  paying  more  than 
its  own  cost  of  carriage,  and  the  other  less. 


58  MILL 

there  will  be  an  increase  of  imports ;  and  by  this,  and  the  check  to 
exportation,  the  equilibrium  of  imports  and  exports  will  be  restored. 
The  result  to  foreign  countries  will  be,  that  they  have  to  pay  dearer 
than  before  for  their  other  imports,  and  obtain  the  new  commodity 
cheaper  than  before,  but  not  so  much  cheaper  as  England  herself 
does.  I  say  this,  being  well  aware  that  the  article  would  be  actually 
at  the  very  same  price  (cost  of  carriage  excepted)  in  England  and 
in  other  countries.  The  cheapness,  however,  of  the  article  is  not 
measured  solely  by  the  money-price,  but  by  that  price  compared 
with  the  money  incomes  of  the  consumers.  The  price  is  the  same 
to  the  English  and  to  the  foreign  consumers ;  but  the  former  pay 
that  price  from  money  incomes  which  have  been  increased  by  the 
new  distribution  of  the  precious  metals ;  while  the  latter  have  had 
their  money  incomes  probably  diminished  by  the  same  cause.  The 
trade,  therefore,  has  not  imparted  to  the  foreign  consumer  the  whole, 
but  only  a  portion,  of  the  benefit  which  the  English  consumer 
has  derived  from  the  improvement ;  while  England  has  also  benefited 
in  the  prices  of  foreign  commodities.  Thus,  then,  any  industrial 
improvement  which  leads  to  the  opening  of  a  new  branch  of  export 
trade,  benefits  a  country  not  only  by  the  cheapness  of  the  article  in 
which  the  improvement  has  taken  place,  but  by  a  general  cheapening 
of  all  imported  products. 

Let  us  now  change  the  hypothesis,  and  suppose  that  the  improve- 
ment, instead  of  creating  a  new  export  from  England,  cheapens  an 
existing  one.  When  we  examined  this  case  on  the  supposition  of 
barter,  it  appeared  to  us  that  the  foreign  consumers  might  either 
obtain  the  same  benefit  from  the  improvement  as  England  herself, 
or  a  less  benefit,  or  even  a  greater  benefit,  according  to  the  degree! 
in  which  the  consumption  of  the  cheapened  article  is  calculated  to 
extend  itself  as  the  article  diminishes  in  price.  The  same  conclu- 
sions will  be  found  true  on  the  supposition  of  money. 

Let  the  commodity  in  which  there  is  an  improvement,  be  cloth. 
The  first  effect  of  the  improvement  is  that  its  price  falls,  and  there 
is  an  increased  demand  for  it  in  the  foreign  market.  But  this  de- 
mand is  of  uncertain  amount.  Suppose  the  foreign  consumers  to 
increase  their  purchases  in  the  exact  ratio  of  the  cheapness,  or  in 
other  words,  to  lay  out  in  cloth  the  same  sum  of  money  as  before ;' 
the  same  aggregate  payment  as  before  will  be  due  from  foreign 


*    DISTRIBUTION  OF  THE  PRECIOUS  METALS  59 

countries  to  England ;  the  equilibrium  of  exports  and  imports  will 
remain  undisturbed,  and  foreigners  will  obtain  the  full  advantage  of 
the  increased  cheapness  of  cloth.  But  if  the  foreign  demand  for 
cloth  is  of  such  a  character  as  to  increase  in  a  greater  ratio  than  the 
cheapness,  a  larger  sum  than  formerly  will  be  due  to  England  for 
cloth,  and  when  paid  will  raise  English  prices,  the  price  of  cloth 
included ;  this  rise,  however,  will  affect  only  the  foreign  purchaser, 
English  incomes  being  raised  in  a  corresponding  proportion ;  and 
the  foreign  consumer  will  thus  derive  a  less  advantage  than  England 
from  the  improvement.  If,  on  the  contrary,  the  cheapening  of 
cloth  does  not  extend  the  foreign  demand  for  it  in  a  proportional 
degree,  a  less  sum  of  debts  than  before  will  be  due  to  England  for 
cloth,  while  there  will  be  the  usual  sum  of  debts  due  from  England 
to  foreign  countries ;  the  balance  of  trade  will  turn  against  England, 
money  will  be  exported,  prices  (that  of  cloth  included)  will  fall,  and 
cloth  will  eventually  be  cheapened  to  the  foreign  purchaser  in  a  still 
greater  ratio,  than  the  improvement  has  cheapened  it  to  England. 
These  are  the  very  conclusions  which  we  deduced  on  the  hypothesis 
of  barter. 

The  result  of  the  preceding  discussion  cannot  be  better  summed 
up  than  in  the  words  of  Ricardo.  "Gold  and  silver  having  been 
chosen  for  the  general  medium  of  circulation,  they  are,  by  the 
competition  of  commerce,  distributed  in  such  proportions  amongst 
the  different  countries  of  the  world  as  to  accommodate  themselves 
to  the  natural  traffic  which  would  take  place  if  no  such  metals 
existed,  and  the  trade  between  countries  were  purely  a  trade  of 
barter."  Of  this  principle,  so  fertile  in  consequences,  previous  to 
which  the  theory  of  foreign  trade  was  an  unintelligible  chaos,  Mr. 
Ricardo,  though  he  did  not  pursue  it  into  its  ramifications,  was  the 
real  originator.  No  writer  who  preceded  him  appears  to  have  had 
a  glimpse  of  it :  and  few  are  those  who  even  since  his  time  have  had 
an  adequate  conception  of  its  scientific  value. 

§  3.  It  is  now  necessary  to  inquire,  in  what  manner  this  law  of 
the  distribution  of  the  precious  metals  by  means  of  the  exchanges, 
affects  the  exchange  value  of  money  itself ;  and  how  it  tallies  with 
the  law  by  which  we  found  that  the  value  of  money  is  regulated 
when  imported  as  a  mere  article  of  merchandize.    For  there  is  here 


6o  MILL 

a  semblance  of  contradiction,  which  has,  I  think,  contributed  more 
than  anything  else  to  make  some  distinguished  political  economists 
resist  the  evidence  of  the  preceding  doctrines.  Money,  they  justly 
think,  is  no  exception  to  the  general  laws  of  value ;  it  is  a  com- 
modity like  any  other,  and  its  average  or  natural  value  must  depend 
on  the  cost  of  producing,  or  at  least  of  obtaining  it.  That  its  dis- 
tribution through  the  world,  therefore,  and  its  different  value  in 
different  places,  should  be  liable  to  be  altered,  not  by  causes  affecting 
itself,  but  by  a  hundred  causes  unconnected  with  it ;  by  everything 
which  affects  the  trade  in  other  commodities,  so  as  to  derange  the 
equilibrium  of  exports  and  imports ;  appears  to  these  thinkers  a 
doctrine  altogether  inadmissible. 

But  the  supposed  anomaly  exists  only  in  semblance.  The  causes 
which  bring  money  into  or  carry  it  out  of  a  country  through  the 
exchanges,  to  restore  the  equilibrium  of  trade,  and  which  thereby 
raise  its  value  in  some  countries  and  lower  it  in  others,  are  the 
very  same  causes  on  which  the  local  value  of  money  would  depend, 
if  it  were  never  imported  except  as  a  merchandize,  and  never  except 
directly  from  the  mines.  When  the  value  of  money  in  a  country 
is  permanently  lowered  by  an  influx  of  it  through  the  balance  of 
trade,  the  cause,  if  it  is  not  diminished  cost  of  production,  must  be 
one  of  those  causes  which  compel  a  new  adjustment,  more  favoura- 
ble to  the  country,  of  the  equation  of  international  demand  :  namely, 
either  an  increased  demand  abroad  for  her  commodities,  or  a  dimin- 
ished demand  on  her  part  for  those  of  foreign  countries.  Now  an 
increased  foreign  demand  for  the  commodities  of  a  country,  or  a 
diminished  demand  in  the  country  for  imported  commodities,  are 
the  very  causes  which,  on  the  general  principles  of  trade,  enable  a 
country  to  purchase  all  imports,  and  consequently  the  precious 
metals,  at  a  lower  value.  There  is  therefore  no  contradiction,  but 
the  most  perfect  accordance  in  the  results  of  the  two  different  modes 
in  which  the  precious  metals  may  be  obtained.  When  money  flows 
from  country  to  country  in  consequence  of  changes  in  the  inter- 
national demand  for  commodities,  and  by  so  doing  alters  its  own 
local  value,  it  merely  realizes,  by  a  more  rapid  process,  the  effect 
which  would  otherwise  take  place  more  slowly,  by  an  alteration  in 
the  relative  breadth  of  the  streams  by  which  the  precious  metals 
flow  into  different  regions  of  the  earth  from  the  mining  countries. 


DISTRIBUTION  OF  THE  PRECIOUS  METALS         6i 

As  therefore  we  before  saw  that  the  use  of  money  as  a  medium  of 
exchange  does  not  in  the  least  alter  the  law  on  which  the  values  of 
other  things,  either  in  the  same  country,  or  internationally,  depend, 
so  neither  does  it  alter  the  law  of  the  value  of  the  precious  metal 
itself :  and  there  is  in  the  whole  doctrine  of  international  values  as 
now  laid  down,  a  unity  and  harmony  which  is  a  strong  collateral 
presumption  of  truth. 

§  4.  Before  closing  this  discussion,  it  is  fitting  to  point  out  in 
what  manner  and  degree  the  preceding  conclusions  are  affected  by 
the  existence  of  international  payments  not  originating  in  commerce, 
and  for  which  no  equivalent  in  either  money  or  commodities  is 
expected  or  received ;  such  as  a  tribute,  or  remittances  of  rent  to 
absentee  landlords  or  of  interest  to  foreign  creditors,  or  a  govern- 
ment expenditure  abroad,  such  as  England  incurs  in  the  manage- 
ment of  some  of  her  colonial  dependencies. 

To  begin  with  the  case  of  barter.  The  supposed  annual  re- 
mittances being  made  in  commodities,  and  being  exports  for  which 
there  is  to  be  no  return,  it  is  no  longer  requisite  that  the  imports 
and  exports  should  pay  for  one  another :  on  the  contrary,  there  must 
be  an  annual  excess  of  exports  over  imports,  equal  to  the  value  of 
the  remittance.  If,  before  the  country  became  liable  to  the  annual 
payment,  foreign  commerce  was  in  its  natural  state  of  equilibrium, 
it  will  now  be  necessary  for  the  purpose  of  effecting  the  remit- 
tances, that  foreign  countries  should  be  induced  to  take  a  greater 
quantity  of  exports  than  before :  which  can  only  be  done  by  offering 
those  exports  on  cheaper  terms,  or  in  other  words,  by  paying  dearer 
for  foreign  commodities.  The  international  values  will  so  adjust 
themselves  that  either  by  greater  exports,  or  smaller  imports,  or  both, 
the  requisite  excess  on  the  side  of  exports  will  be  brought  about; 
and  this  excess  will  become  the  permanent  state.  The  result  is, 
that  a  country  which  makes  regular  payments  to  foreign  countries, 
besides  losing  what  it  pays,  loses  also  something  more,  by  the  less 
advantageous  terms  on  which  it  is  forced  to  exchange  its  productions 
for  foreign  commodities. 

The  same  results  follow  on  the  supposition  of  money.  Commerce 
being  supposed  to  be  in  a  state  of  equilibrium  when  the  obligatory 
remittances  begin,  the  first  remittance  is  necessarily  made  in  money. 


62  MILL 

This  lowers  prices  in  the  remitting  country,  and  raises  them  in  the 
receiving.  The  natural  effect  is  that  more  commodities  are  ex- 
ported than  before,  and  fewer  imported,  and  that,  on  the  score 
of  commerce  alone,  a  balance  of  money  will  be  constantly  due 
from  the  receiving  to  the  paying  country.  When  the  debt  thus 
annually  due  to  the  tributar}^  country  becomes  equal  to  the 
annual  tribute  or  other  regular  payment  due  from  it,  no  further 
transmission  of  money  takes  place ;  the  equilibrium  of  exports  and 
imports  will  no  longer  exist,  but  that  of  payments  will ;  the  exchange 
will  be  at  par,  the  two  debts  will  be  set  off  against  one  another,  and 
the  tribute  or  remittance  will  be  virtually  paid  in  goods.  The  result  to 
the  interests  of  the  two  countries  will  be  as  already  pointed  out :  the 
paying  country  will  give  a  higher  price  for  all  that  it  buys  from  the 
receiving  country,  while  the  latter,  besides  receiving  the  tribute,  ob- 
tains the  exportable  produce  of  the  tributary  country  at  a  lower  price. 


MILL:    EFFECTS  TRODUCED   ON   INTERNATIONAL 
EXCHANGE    BY    DUTIES    ON    EXPORTS    AND    ON 

IMPORTS^ 

*        *        *•*        *        *        *        *        *        *        * 

§  6.  There  is  one  more  point,  relating  to  the  operation  of  taxes 
on  commodities  conveyed  from  one  country  to  another,  which  re- 
quires notice ;  the  influence  which  they  exert  on  international  ex- 
changes. Every  tax  on  a  commodity  tends  to  raise  its  price,  and 
consequently  to  lessen  the  demand  for  it  in  the  market  in  which  it 
is  sold.  All  taxes  on  international  trade  tend,  therefore,  to  produce 
a  disturbance  and  a  re-adjustment  of  what  we  have  termed  the 
Equation  of  International  Demand.  This  consideration  leads  to 
some  rather  curious  consequences,  which  have  been  pointed  out 
in  the  separate  essay"  on  International  Commerce  already  several 
times  referred  to  in  this  treatise. 

Taxes  on  foreign  trade  are  of  two  kinds — taxes  on  imports,  and 
on  exports.  On  the  first  aspect  of  the  matter  it  would  seem  that 
both  these  taxes  are  paid  by  the  consumers  of  the  commodity ;  that 
taxes  on  exports  consequently  fall  entirely  on  foreigners,  taxes  on 

^MiJl,  Principles,  Bk.  \',  chajx  iv. 


DUTIES  ON  EXPORTS  AND  ON  IMPORTS  63 

imports  wholly  on  the  home  consumer.  The  true  state  of  the  case, 
however,  is  much  more  complicated. 

"By  taxing  exports,  we  may,  in  certain  circumstances,  produce 
a  division  of  the  advantage  of  the  trade  more  favourable  to  our- 
selves. In  some  cases  we  may  draw  into  our  coffers,  at  the  expense 
of  foreigners,  not  only  the  whole  tax,  but  more  than  the  tax ;  in 
other  cases,  we  should  gain  exactly  the  tax ;  in  others,  less  than  the 
tax.  In  this  last  case,  a  part  of  the  tax  is  borne  by  ourselves  ;  possibly 
the  whole,  possibly  even,  as  we  shall  show,  more  than  the  whole." 

Reverting  to  the  supposititious  case  employed  in  the  Essay,  of  a 
trade  between  Germany  and  England  in  broadcloth  and  linen,  "sup- 
pose that  England  taxes  her  export  of  cloth,  the  tax  not  being 
supposed  high  enough  to  induce  Germany  to  produce  cloth  for  her- 
self. The  price  at  which  cloth  can  be  sold  in  Germany  is  augmented 
by  the  tax.  This  will  probably  diminish  the  quantity  consumed. 
It  may  diminish  it  so  much  that,  even  at  the  increased  price,  there 
will  not  be  required  so  great  a  money  value  as  before.  Or  it  may 
not  diminish  it  at  all,  or  so  little,  that  in  consequence  of  the  higher 
price,  a  greater  money  value  will  be  purchased  than  before.  In  this 
last  case,  England  will  gain,  at  the  expense  of  Germany,  not  only 
the  whole  amount  of  the  duty,  but  more ;  for,  the  money  value  of 
her  exports  to  Germany  being  increased,  while  her  imports  remain 
the  same,  money  will  flow  into  England  from  Germany.  The  price 
of  cloth  will  rise  in  England,  and  consequently  in  Germany  ;  but  the 
price  of  linen  will  fall  in  Germany,  and  consequently  in  England. 
We  shall  export  less  cloth,  and  import  more  linen,  till  the  equilibrium 
is  restored.  It  thus  appears  (what  is  at  first  sight  somewhat  re- 
markable) that  by  taxing  her  exports,  England  would,  in  some  con- 
ceivable circumstances,  not  only  gain  from  her  foreign  customers  the 
whole  amount  of  the  tax,  but  would  also  get  her  imports  cheaper.  She 
would  get  them  cheaper  in  two  ways ;  for  she  would  obtain  them  for 
less  money,  and  would  have  more  money  to  purchase  them  with.  Ger- 
many, on  the  other  hand,  would  suffer  doubly  :  she  would  have  to  pay 
for  her  cloth  a  price  increased  not  only  by  the  duty,  but  by  the  influx 
of  money  into  England,  while  the  same  change  in  the  distribution  of 
the  circulating  medium  would  leave  her  less  money  to  purchase  it  with. 

"This  however,  is  only  one  of  three  possible  cases.  If,  after  the 
imposition  of  the  duty,  Germany  requires  so  diminished  a  quantity 


64  MILL 

of  cloth,  that  its  total  value  is  exactly  the  same  as  before,  the  balance 
of  trade  would  be  undisturbed ;  England  will  gain  the  duty,  Ger- 
many will  lose  it,  and  nothing  more.  If,  again,  the  imposition  of 
the  duty  occasions  such  a  falling  off  in  the  demand  that  Germany 
requires  a  less  pecuniary  value  than  before,  our  exports  will  no 
longer  pay  for  our  imports ;  money  must  pass  from  England  into 
Germany ;  and  Germany's  share  of  the  advantage  of  the  trade  will 
be  increased.  By  the  change  in  the  distribution  of  money,  cloth  will 
fall  in  England  ;  and  therefore  it  will,  of  course,  fall  in  Germany. 
Thus  Germany  will  not  pay  the  whole  of  the  tax.  From  the  same 
cause,  linen  will  rise  in  Germany,  and  consequently  in  England. 
When  this  alteration  of  prices  has  so  adjusted  the  demand,  that  the 
cloth  and  the  linen  again  pay  for  one  another,  the  result  is  that 
Germany  has  paid  only  a  part  of  the  tax,  and  the  remainder  of  what 
has  been  received  into  our  treasury  has  come  indirectly  out  of  the 
pockets  of  our  own  consumers  of  linen,  who  pay  a  higher  price  for 
that  imported  commodity  in  consequence  of  the  tax  on  our  exports, 
while  at  the  same  time  they,  in  consequence  of  the  efflux  of  money 
and  the  fall  of  prices,  have  smaller  money  incomes  wherewith  to 
pay  for  the  linen  at  that  advanced  price. 

"It  is  not  an  impossible  supposition  that  by  taxing  our  exports 
we  might  not  only  gain  nothing  from  the  foreigner,  the  tax  being 
paid  out  of  our  own  pockets,  but  might  even  compel  our  own  people 
to  pay  a  second  tax  to  the  foreigner.  Suppose,  as  before,  that  the 
demand  of  Germany  for  cloth  falls  off  so  much  on  the  imposition  of 
the  duty,  that  she  requires  a  smaller  money  value  than  before,  but 
that  the  case  is  so  different  with  linen  in  England,  that  when  the 
price  rises  the  demand  either  does  not  fall  off  at  all,  or  so  little  that 
the  money  value  required  is  greater  than  before.  The  first  effect  of 
laying  on  the  duty  is,  as  before,  that  the  cloth  exported  will  no  longer 
pay  for  the  linen  imported.  Money  will  therefore  flow  out  of  Eng- 
land into  Germany.  One  effect  is  to  raise  the  price  of  linen  in  Ger- 
many, and  consequently  in  England.  But  this,  by  the  supposition, 
instead  of  stopping  the  efflux  of  money,  only  makes  it  greater, 
because  the  higher  the  j)rice,  the  greater  the  money  value  of  the 
linen  consumed.  The  balance,  therefore,  can  only  be  restored  by 
the  other  effect,  which  is  going  on  at  the  same  time,  namely,  the 
fall    of   cloth    in    the    English    and    consequently    in    the    German 


DUTIES  OX  EXPORTS  AXD  ON  IMPORTS  65 

market.  Even  when  cloth  has  fallen  so  low  that  its  price  with  the 
duty  is  only  equal  to  what  its  price  without  the  duty  was  at  first, 
it  is  not  a  necessary  consequence  that  the  fall  will  stop ;  for  the 
same  amount  of  exportation  as  before  will  not  now  suffice  to  pay 
the  increased  money  value  of  the  imports ;  and  although  the  Ger- 
man consumers  have  now  not  only  cloth  at  the  old  price,  but  like- 
wise increased  money  incomes,  it  is  not  certain  that  they  will  be 
inclined  to  employ  the  increase  of  their  incomes  in  increasing  their 
purchases  of  cloth.  The  price  of  cloth,  therefore,  must  perhaps  fall, 
to  restore  the  equilibrium,  more  than  the  whole  amount  of  the  duty ; 
Germany  may  be  enabled  t©  import  cloth  at  a  lower  price  when  it  is 
taxed,  than  when  it  was  untaxed :  and  this  gain  she  will  acquire  at 
the  expense  of  the  English  consumers  of  linen,  who,  in  addition,  will 
be  the  real  payers  of  the  whole  of  what  is  received  at  their  own 
custom-house  under  the  name  of  duties  on  the  export  of  cloth." 

It  is  almost  unnecessary  to  remark  that  cloth  and  linen  are  here 
merely  representatives  of  exports  and  imports  in  general ;  and 
that  the  effect  which  a  tax  on  exports  might  have  in  increasing  the 
cost  of  imports,  would  affect  the  imports  from  all  countries,  and 
not  peculiarly  the  articles  which  might  be  imported  from  the 
particular  country  to  which  the  taxed  exports  were  sent. 

"Such  are  the  extremely  various  effects  which  may  result  to 
ourselves  and  to  our  customers  from  the  imposition  of  taxes  on  our 
exports ;  and  the  determining  circumstances  are  of  a  nature  so 
imperfectly  ascertainable,  that  it  must  be  almost  impossible  to 
decide  with  any  certainty,  even  after  the  tax  has  been  imposed, 
whether  we  have  been  gainers  by  it  or  losers."  In  general  however 
there  could  be  little  doubt  that  a  country  which  imposed  such 
taxes  would  succeed  in  making  foreign  countries  contribute  some- 
thing to  its  revenue ;  but  unless  the  taxed  article  be  one  for  which 
their  demand  is  extremely  urgent,  they  will  seldom  pay  the  whole 
of  the  amount  which  the  tax  brings  in.^  "In  any  case,  whatever 
we  gain  is  lost  by  somebody  else,  and  there  is  the  expense  of  the 

1  Probably  the  strongest  known  instance  of  a  large  revenue  raised  from  for- 
eigners by  a  tax  on  exports,  is  the  opium  trade  with  China.  The  high  price  of 
the  article  under  the  Government  monopoly  (which  is  equivalent  to  a  high  ex- 
port duty)  has  so  little  effect  in  discouraging  its  consumption,  that  it  is  said  to 
have  been  occasionally  sold  in  China  for  as  much  as  its  weight  in  silver. 


66  MILL 

collection  besides :  if  international  morality,  therefore,  were  rightly 
understood  and  acted  upon,  such  taxes,  as  being  contrary  to  the 
universal  weal,  would  not  exist." 

Thus  far  of  duties  on  exports.  We  now  proceed  to  the  more 
ordinary  case  of  duties  on  imports.  "We  have  had  an  example 
of  a  tax  on  exports,  that  is  on  foreigners,  falling  in  part  on  our- 
selves. We  shall  therefore  not  be  surprised  if  we  find  a  tax  on 
imports,  that  is,  on  ourselves,  partly  falling  upon  foreigners. 

"Instead  of  taxing  the  cloth  which  we  export,  suppose  that  we 
tax  the  linen  which  we  import.  The  duty  which  we  are  now  sup- 
posing must  not  be  what  is  termed  a  protecting  duty,  that  is,  a 
duty  sufficiently  high  to  induce  us  to  produce  the  article  at  home. 
If  it  had  this  effect,  it  would  destroy  entirely  the  trade  both  in 
cloth  and  in  linen,  and  both  countries  would  lose  the  whole  of  the 
advantage  which  they  previously  gained  by  exchanging  those  com- 
modities with  one  another.  We  suppose  a  duty  which  might  dimin- 
ish the  consumption  of  the  article,  but  which  would  not  prevent 
us  from  continuing  to  import,  as  before,  whatever  linen  we  did 
consume. 

"The  equilibrium  of  trade  would  be  disturbed  if  the  imposition 
of  the  tax  diminished,  in  the  slightest  degree,  the  quantity  of  linen 
consumed.  For,  as  the  tax  is  levied  at  our  own  custom-house,  the  Ger- 
man exporter  only  receives  the  same  price  as  formerly,  though  the 
English  consumer  pays  a  higher  one.  If,  therefore,  there  be  any 
diminution  of  the  quantity  bought,  although  a  larger  sum  of 
money  may  be  actually  laid  out  in  the  article,  a  smaller  one  will 
be  due  from  England  to  Germany :  this  sum  will  no  longer  be  an 
equivalent  for  the  sum  due  from  Germany  to  England  for  cloth, 
the  balance  therefore  must  be  paid  in  money.  Prices  will  fall  in 
Germany  and  rise  in  England ;  linen  will  fall  in  the  German 
market ;  cloth  will  rise  in  the  English.  The  Germans  will  pay 
a  higher  price  for  cloth,  and  will  have  smaller  money  incomes 
to  buy  it  with ;  while  the  English  will  obtain  linen  cheaper, 
that  is,  its  price  will  exceed  what  it  previously  was  by  less  than 
the  amount  of  the  duty,  while  their  means  of  purchasing  it  will 
be  increased  by  the  increase  of  their  money  incomes. 

"If  the  imposition  of  the  tax  does  not  diminish  the  demand,  it 
will  leave  the  trade  exactly  as  it  was  before.    We  shall  import  as 


DUTIES  ON  EXPORTS  AND  ON  IMPORTS  67 

much,  and  export  as  much ;  the  whole  of  the  tax  will  be  paid  out 
of  our  own  pockets. 

"But  the  imposition  of  a  tax  on  a  commodity  almost  always 
diminishes  the  demand  more  or  less ;  and  it  can  never,  or  scarcely 
ever,  increase  the  demand.  It  may,  therefore,  be  laid  down  as  a 
principle,  that  a  tax  on  imported  commodities,  when  it  really 
operates  as  a  tax,  and  not  as  a  prohibition  either  total  or  partial, 
almost  always  falls,  in  part  upon  the  foreigners  who  consume  our 
goods ;  and  that  this  is  a  mode  in  which  a  nation  may  appropriate 
to  itself,  at  the  expense  of  foreigners,  a  larger  share  than  would 
otherwise  belong  to  it  of  the  increase  in  the  general  productiveness 
of  the  labour  and  capital  of  the  world,  which  results  from  the 
interchange  of  commodities  among   nations." 

Those  are,  therefore,  in  the  right  who  maintain  that  taxes  on 
imports  are  partly  paid  by  foreigners ;  but  they  are  mistaken 
when  they  say,  that  it  is  by  the  foreign  producer.  It  is  not  on  the 
person  from  whom  w^e  buy,  but  on  all  those  who  buy  from  us, 
that  a  portion  of  our  custom  duties  spontaneously  falls.  It  is  the 
foreign  consumer  of  our  exported  commodities,  who  is  obliged  to 
pay  a  higher  price  for  them  because  we  maintain  revenue  duties  on 
foreign   goods. 

There  are  but  two  cases  in  which  duties  on  commodities  can  in 
any  degree,  or  in  any  manner,  fall  on  the  producer.  One  is,  when 
the  article  is  a  strict  monopoly,  and  at  a  scarcity  price.  The  price 
in  this  case  being  only  limited  by  the  desires  of  the  buyer ;  the  sum 
obtained  for  the  restricted  supply  being  the  utmost  which  the 
buyers  would  consent  to  give  rather  than  go  without  it ;  if  the 
treasury  intercepts  a  part  of  this,  the  price  cannot  be  further  raised 
to  compensate  for  the  tax,  and  it  must  be  paid  from  the  monopoly 
profits.  A  tax  on  rare  and  high  priced  wines  will  fall  wholly  on 
the  growers,  or  rather,  on  the  owners  of  the  vineyards.  The  second 
case  in  which  the  producer  sometimes  bears  a  portion  of  the  tax, 
is  more  important :  the  case  of  duties  on  the  produce  of  land  or 
of  mines.  These  might  be  so  high  as  to  diminish  materially  the 
demand  for  the  produce,  and  compel  the  abandonment  of  some  of 
the  inferior  qualities  of  land  or  mines.  Supposing  this  to  be  the 
effect,  the  consumers,  both  in  the  country  itself  and  in  those  which 
dealt  with  it,  would  obtain  the  produce  at  smaller  cost ;  and  a  part 


68  MILL 

only,  instead  of  the  whole,  of  the  duty  would  fall  on  the  purchaser, 
who  would  be  indemnified  chiefly  at  the  expense  of  the  landowners 
or  mine-owners   in  the  producing  country. 

Duties  on  importation  may,  then,  be  divided  "  into  two  classes : 
those  which  have  the  effect  of  encouraging  some  particular  branch 
of  domestic  industry,  and  those  which  have  not.  The  former  are 
purely  mischievous,  both  to  the  country  imposing  them,  and  to 
those  with  whom  it  trades.  They  prevent  a  saving  of  labour  and 
capital,  which,  if  permitted  to  be  made,  would  be  divided  in  some 
proportion  or  other  between  the  importing  country  and  the  coun- 
tries which  buy  what  that  country  does  or  might  export. 

"The  other  class  of  duties  are  those  which  do  not  encourage  one 
mode  of  procuring  an  article  at  the  expense  of  another,  but  allow 
interchange  to  take  place  just  as  if  the  duty  did  not  exist,  and  to 
produce  the  saving  of  labour  which  constitutes  the  motive  to  inter- 
national, as  to  all  other  commerce.  Of  this  kind  are  duties  on  the 
importation  of  any  commodity  which  could  not  by  any  possibility 
be  produced  at  home ;  and  duties  not  sufficiently  high  to  counter- 
balance the  difference  of  expense  between  the  production  of  the 
article  at  home  and  its  importation.  Of  the  money  which  is  brought 
into  the  treasury  of  any  country  by  taxes  of  this  last  description, 
a  part  only  is  paid  by  the  people  of  that  country ;  the  remainder 
by  the  foreign  consumers  of  their  goods. 

"Nevertheless,  this  latter  kind  of  taxes  are  in  principle  as  ineli- 
gible as  the  former,  though  not  precisely  on  the  same  ground. 
A  protecting  duty  can  never  be  a  cause  of  gain,  but  always  and 
necessarily  of  loss,  to  the  country  imposing  it,  just  so  far  as  it  is 
ef^cacious  to  its  end.  A  non-protecting  duty,  on  the  contrary,  would 
in  most  cases  be  a  source  of  gain  to  the  country  imposing  it,  in 
so  far  as  throwing  part  of  the  weight  of  its  taxes  upon  other  people 
is  a  gain ;  but  it  would  be  a  means  which  it  could  seldom  be 
advisable  to  adopt,  being  so  easily  counteracted  by  a  precisely 
similar  proceeding  on  the  other  side. 

"If  England,  in  the  case  already  supposed,  sought  to  obtain  for 
herself  more  than  her  natural  share  of  the  advantage  of  the  trade 
with  Germany,  by  imposing  a  duty  upon  linen,  Germany  would 
only  have  to  impose  a  duty  upon  cloth,  sufficient  to  diminish  the 
demand  for  that  article  about  as  much  as  the  demand   for  linen 


DUTIES  ON  EXPORTS  AND  ON  IMPORTS  69 

had  been  diminished  in  England  by  the  tax.  Things  would  then 
be  as  before,  and  each  country  would  pay  its  own  tax.  Unless, 
indeed,  the  sum  of  the  two  duties  exceeded  the  entire  advantage 
of  the  trade ;  for  in  that  case  the  trade,  and  its  advantage,  would 
cease  entirely. 

"There  would  be  no  advantage,  therefore,  in  imposing  duties 
of  this  kind,  with  a  view  to  gain  by  them  in  the  manner  which 
has  been  pointed  out.  But  when  any  part  of  the  revenue  is  derived 
from  taxes  on  commodities,  these  may  often  be  as  little  objection- 
able as  the  rest.  It  is  evident,  too,  that  considerations  of  reciproc- 
ity, which  are  quite  unessential  when  the  matter  in  debate  is  a 
protecting  duty,  are  of  material  importance  when  the  repeal  of 
duties  of  this  other  description  is  discussed.  A  country  cannot  be 
expected  to  renounce  the  power  of  taxing  foreigners,  unless  for- 
eigners will  in  return  practise  towards  itself  the  same  forbearance. 
The  only  mode  in  which  a  country  can  save  itself  from  being  a 
loser  by  the  revenue  duties  imposed  by  other  countries  on  its  com- 
modities, is  to  impose  corresponding  revenue  duties  on  theirs.  Only 
it  must  take  care  that  those  duties  be  not  so  high  as  to  exceed  all 
that  remains  of  the  advantage  of  the  trade,  and  put  an  end  to 
importation  altogether,  causing  the  article  to  be  either  produced  at 
home,  or  imported  from  another  and  a  dearer  market." 


Ill 

CAIRNES:  ON  SOME  MINOR  TOPICS^ 

I  PROPOSE  to  devote  this  concluding  chapter  on  International 
Trade  to  the  consideration  of  some  topics  which  seem  to  fall 
more  easily  under  this  than  under  other  headings — topics  more  or 
less  involved,  and  in  general  tacitly  decided  in  one  sense  or  another, 
in  most  commercial  and  monetary  discussions,  but  the  current 
ideas  respecting  which  are  by  no  means  in  accordance  with  the 
main  principles  of  international  trade  as  these  have  been  developed 
in  the  foregoing  pages. 

The  first  of  those  questions  to  which  I  would  ask  the  reader's 
attention  is  the  following :  What  is  the  interest  of  a  country  in  the 
scale  of  its  general  prices?  Is  it  for  the  advantage  of  the  people, 
as  a  whole,  that  the  scale  should  be  high  or  low  ?  and,  assuming 
that  they  have  an  interest  in  either  alternative,  what  is  the  nature 
of  the  advantage,  and  what  are  its  limits?  A  moment's  reflection 
will  enable  us  to  take  at  least  one  step  toward  the  solution  of  our 
problem :  the  interest  involved,  whatever  be  its  character  and 
extent,  can  only  be  real  so  far  forth  as  the  high  or  low  scale  of 
prices  is  not  universal — so  far  forth,  that  is  to  say,  as  it  is  not 
shared  in  the  same  degree  by  all  countries.  A  country  can  have 
no  permanent  interest  in  an  advance,  or  in  a  fall  of  prices,  which 
embraces  the  whole  commercial  world.  Such  a  change  leaves  the 
purchasing  power  of  each  country  in  relation  to  every  other  pre- 
cisely where  it  was  before ;  reciprocal  demand,  therefore,  would 
continue  unaffected,  and,  by  consequence,  international  values,  and 
all  interests  that  depend  on  that  relation.  But  where  the  advance 
or  fall  is  not  general — where  the  high  or  low  scale  of  prices  is 
confined  to  one,  or  to  a  few  countries — it  is  not  at  once  apparent 
how  it  may  affect  the  interest  of  those  concerned. 

ijohn  Elliot  Cairnes  (1823-1875),  Some  Principles  of  Political  Economy 
newly  Expounded  (1874),  Part  III,  chap.  v. 


ON  SOME  MINOR  TOPICS  71 

I  ought  here,  perhaps,  to  refer  to  a  maxim  advanced  by  some 
writers  on  monetary  questions  which,  if  well  founded,  would  seem 
to  preclude  the  existence  of  the  phenomenon,  the  character  of  which 
I  propose  to  discuss.  It  is  held  by  the  writers  to  whom  I  refer 
that  the  value  of  gold  is,  and  must  ever  be,  "the  same  all  the 
world  over."^  Now  if  this  be  so,  as  the  value  of  gold  is  merely 
another  expression  for  the  gold  prices  of  commodities,  it  must 
follow  that  a  high  or  a  low  scale  of  general  prices  existing  in  any 
country,  and  not  shared  by  every  other,  is  an  impossible  occur- 
rence. As  there  is  no  local  value  of  gold,  so  there  can  be  no  local 
scale  of  prices.  I  have  no  hesitation,  however,  in  expressing  my 
opinion  that  the  doctrine  in  question,  with  whatever  confidence 
advanced,  is  absolutely  destitute  of  foundation.  The  truth  on  the 
subject  seems  to  me  to  be  as  follows :  among  countries  commer- 
cially connected  there  is  a  large  class  of  commodities — all  those, 
namely,  which  constitute  the  great  staples  of  commerce,  such  as 
corn,  flour,  tea,  sugar,  metals,  and  most  raw  materials  of  industry 
— of  which  the  prices  can  not  vary  much  in  different  localities. 
As  a  rule  the  difference  of  prices  will  not  be  greater  than  the  cost 
of  carriage  between  the  countries  of  production  and  consumption, 
always,  of  course,  excepting  the  case  where  such  articles  come 
under  the  operation  of  local  fiscal  laws.  In  the  exchange  for 
commodities  of  this  description,  the  value  of  gold,  though  not  the 
same  all  the  world  over,  does  not  greatly  vary  within  the  range 
of  general  commerce.  But  besides  the  commodities  which  form 
the  staples  of  commerce,  there  are  those  which,  through  unsuit- 
ableness  for  distant  traffic,  or  owing  to  some  other  obstacle,  do 
not  enter  into  international  trade.  With  regard  to  these,  there  is 
nothing  to  prevent  the  widest  divergence  in  their  gold  prices,  or, 
therefore,  in  the  value  of  gold  in  relation  to  them,  not  merely  in 
remote  quarters  of  the  world,  but  sometimes  even  in  localities  within 
the  same  country ;  and  the  class  of  goods  to  which  this  description 
applies — it  will  vary  in  extent  with  the  situation  of  each  country 
and  the  means  of  communication  at  its  command — far  from  being 

lit  is  probable  that  by  "the  value  of  gold"  the  writers  in  question  mean  to 
designate  its  value  on  loan  as  well  as  its  exchange  value.  But  a  reference  to  the 
rates  of  interest  prevailing  at  any  given  time  in  the  principal  money  markets  of 
the  world  will  suffice  at  once  to  refute  this  part  of  the  doctrine. 


72  CAIRNES 

insignificant,  must  under  all  circumstances  include  some  of  the 
most  important  articles  of  general  consumption.  To  perceive  this, 
it  is  only  necessary  to  remember  that  the  group  includes  the  items 
of  house  accommodation,  meat,  and  a  large  proportion  of  those 
things  which  fall  under  the  head  of  "provisions" — a  list  which 
would  have  to  be  greatly  enlarged  if  we  had  to  deal  with  countries 
lying  aside  from  the  leading  thoroughfares  of  commerce,  or  in  which 
the  means  of  communication  have  been  imperfectly  developed. 

It  is  not  true,  therefore,  that  gold  is  of  the  same  value  "all  the 
world  over."  On  the  contrary,  it  varies  in  value  in  different  countries, 
and  sometimes  in  different  localities  within  the  same  country,  in  some 
degree  in  relation  to  almost  all  commodities,  but,  in  relation  to  a 
numerous  and  important  class  of  commodities,  in  a  very  consider- 
able degree,  and  this,  not  merely  as  a  temporary  fluctuation,  but 
permanently,  as  a  normal  state  of  things ;  and  the  problem  we 
have  now  to  consider  is,  whether,  the  case  being  so,  it  is  advan- 
tageous for  the  inhabitants  of  a  country  that  the  scale  of  its  prices, 
within  the  possible  limits  of  permanent  divergence,  should  be 
high  or  low  in  relation  to  the  cosmopolitan  level. 

The  majority  of  those  who  write  or  speak  on  commercial  ques- 
tions would,  I  imagine,  have  little  hesitation  in  pronouncing  in 
favor  of  the  former  alternative ;  and  plainly  the  most  obvious  ap- 
pearances support  this  view.  A  high  scale  of  prices  and  large 
accumulated  wealth  for  the  most  part  go  together,  while  low  prices 
are  the  incident  of  districts  remote  from  the  main  current  of 
civilization,  and  in  general  poor  and  barbarous.  If  we  inquire, 
however,  as  to  the  nature  of  the  connection  between  the  phenom- 
ena in  each  case,  the  answer  does  not  by  any  means  lie  upon  the 
surface.  Let  it  be  remembered  that  a  difference  in  local  prices,  if 
considerable  and  permanent,  can  only  exist  in  the  case  of  commod- 
ities which  can  not  be  made  the  subject  of  foreign  commerce. 
High  prices,  therefore,  can  not  serve  us  in  our  dealings  with 
foreign  nations,  and  it  is  not  by  any  means  clear  how  the  people 
of  a  country  can  be  profited  by  exchanging  their  goods  among  them- 
selves on  a  high  pecuniary  scale.  Moreover  it  is  evident  that,  with 
regard  to  those  commodities  which  do  enter  into  foreign  commerce, 
it  is  the  interest  of  each  competing  nation  that  their  prices  should 


ON  SOME  MINOR  TOPICS  73 

be  relatively  as  low  as  possible ;  this  being  the  condition  of  com- 
manding a  sale  for  them  in  neutral  markets.  Granting,  therefore, 
that  high  prices  and  accumulated  wealth  on  the  one  hand,  and  low 
prices  and  poverty  on  the  other,  are  generally  coincident  phenom- 
ena, we  have  yet  to  discover  wherein  consists  the  bond  that 
connects  them. 

The  solution  of  the  problem  is  contained  in  the  following  state- 
ment :  What  a  nation  is  interested  in  is,  not  in  having  its  prices 
high  or  low,  but  in  having  its  gold  cheap — understanding  by  cheap- 
ness^ not  low  value,  but  low  cost — a  small  sacrifice  of  ease  and 
comfort ;  and  it  generally  happens  that  cheap  gold  is  accompanied 
by  a  high  scale  of  prices.  I  say  "generally  happens,"  because  it 
by  no  means  follows  as  a  necessary  consequence  that  the  two 
phenomena  should  go  together.  Gold  may  be  cheap,  and  prices, 
at  the  same  time,  low,  as  a  little  reflection  will  easily  convince  us. 
The  range  of  prices  that  actually  prevails  in  a  country  is,  speaking 
broadly,  the  resultant  of  two  conditions — the  cost  at  which  that 
country  produces  or  obtains  its  gold,  and  the  cost  at  which  it 
produces  or  obtains  commodities.  Fluctuations  and  disturbing 
causes  apart,  the  gold  and  the  commodities  will  exchange  for  each 
other  in  proportion  to  their  costs ;  and  cheap  gold,  therefore,  will 
be  the  concomitant  of  high  prices,  only  in  so  far  as  the  cheapness 
incident  to  the  gold  is  not  shared  by  the  other  products  of  industry. 
The  cheapness  of  gold,  for  example,  in  Australia  does  not  occasion 
a  high  price  of  meat,  of  flour,  of  wool,  of  tallow,  of  hides,  or  of 
many  other  articles  in  that  country,  because  the  cost  of  producing 
those  articles  there  is  also  very  low.  Any  of  them  can  be  purchased 
in  Australia  at  as  low  a  price  as  in  Europe :  many  of  them,  meat 
and  wool,  for  example,  at  considerably  lower  prices.  It  is  thus 
evident  that  cheap  gold  is  no  necessary  concomitant  of  a  high  scale 
of  prices.  We  must,  therefore,  distinguish  between  the  two  things ; 
and,  so  distinguishing,  I  have  now  to  show  that  the  interest  of  a 

1  This  is,  I  admit,  a  departure  from  ordinary  usage,  "  cheap "  being  more  com- 
monly applied  to  price  or  value  than  to  cost  of  production.  But  we  much  need 
a  word  to  express  low  cost  as  distinguished  from  low  price  or  value,  and  it 
seems  to  me  that  "cheapness"  may  conveniently  be  appropriated  to  this  pur- 
pose. At  all  events,  having  had  notice  of  the  sense  in  which  I  use  the  word, 
the  reader  will  not  be  misled. 


74  CAIRNES 

nation  lies,  not  in  having  its  prices  high,  but  in  having  its  gold 
cheap ;  and  that  it  is  only  in  so  far  as  high  prices  are  an  indication 
of  cheap  gold,  and  low  prices  an  indication  of  dear  gold,  that  either 
can  be  considered  as  furnishing  any  presumption  whether  in  favor 
of  or  against  the  wealth  or  well-being  of  a  community. 

As  I  remarked  just  now,  the  problem  we  are  considering  can  only 
arise  with  reference  to  relative  prices.  A  rise  or  fall  of  prices  shared 
by  all  nations  equally  can  not  affect  the  interest  of  any ;  and  simi- 
larly the  cheapness  or  dearness  of  gold — considered  in  the  capacity 
in  which  we  are  now  regarding  it,  as  the  instrument  of  general  com- 
merce, not  as  a  commodity  intended  for  consumption — is  only  of 
importance  in  so  far  as  it  is  not  universal.  Gold  cheapened  every- 
where and  in  the  same  degree,  would  mean,  other  things  being  the 
same,  an  equal  and  universal  rise  of  prices,  and  there  would  ob- 
viously be  no  advantage  in  obtaining  our  gold  at  a  lower  cost  if 
we  were  compelled  to  give  proportionally  more  of  it  for  all  that 
we  required.  But  assuming — what  is  simple  matter  of  fact — that 
the  cost  at  which  different  nations  obtain  their  gold  is  different — 
that  the  cost  may  be  reduced  in  some  countries  without  undergoing 
a  corresponding  reduction  in  others — then  a  manifest  advantage 
arises  to  a  nation  from  the  cheapness  of  its  gold ;  for  just  in  pro- 
portion as  it  obtains  its  gold  at  small  cost — by  a  small  expenditure 
of  labor  and  abstinence — it  will  obtain  at  small  cost  all  its  imported 
commodities.  The  advantage  would,  indeed,  be  confined  to  its 
foreign  trade.  In  domestic  exchanges  prices  would  adapt  them- 
selves to  the  cheapened  cost  of  money,  and  in  this  field  of  its 
activity  neither  good  nor  evil  would  result  for  the  nation  as  a  whole ; 
but  in  its  dealings  with  foreign  nations  it  would  be  otherwise.  In 
relation  to  them,  its  position,  as  commanding  gold  on  terms  of  ex- 
ceptional cheapness,  would  be  one  of  vantage,  and  would  enable  it 
through  this  cheapened  medium  to  obtain  from  them,  on  terms  cor- 
respondingly advantageous,  all  that  they  are  capable  of  supplying. 

Such  is  the  nature  of  the  advantage  which  a  country  derives  from 
the  relative  cheapness  of  its  gold ;  and,  as  I  have  already  remarked, 
in  old  countries  cheap  gold  is  generally  accompanied  by  a  high 
scale  of  prices  for  all  commodities  not  falling  within  the  range  of 
international  trade.  To  exhibit  the  grounds  of  this  connection  we 
may  take  the  case  of  Great  Britain.    The  cost  of  gold  is  lower  in 


ON  SOME  MINOR  TOPICS  75 

Great  Britain  than  in  any  country  in  Europe,  or,  we  may  say 
broadly,  than  in  any  in  the  world,  America  and  Australia  excepted. 
The  evidence  of  this  is  to  be  found  in  the  scale  of  our  industrial 
remuneration  measured  in  gold.^  To  what  is  the  fact  to  be  attrib- 
uted ?  To  this,  that  we  possess  in  our  coal,  iron,  and  other  mineral 
fields,  combined  with  the  skill  and  energy  of  our  inhabitants,  su- 
perior resources  to  those  possessed  by  other  countries  for  the  produc- 
tion of  certain  manufactures  in  extensive  demand  throughout  the 
world.  Producing  such  manufactures  at  less  cost  than  they  can  be 
produced  at  by  other  nations,  and  finding  for  them  an  extensive 
demand  throughout  the  world,  we  are  enabled  at  once  to  undersell 
other  nations  in  neutral  markets,  and  yet  at  the  same  time  to  obtain 
for  our  products  a  price  which  bears  a  larger  proportion  to  their 
cost  of  production — to  the  labor  and  abstinence  employed  in  pro- 
ducing them — than  the  price  obtained  by  foreign  nations  for  their 
products  bears  to  the  cost  of  such  products.  A  given  expenditure 
of  labor  and  abstinence  in  this  country  thus  enables  us  to  command 
a  larger  result  in  gold  than  the  same  expenditure  would  enable 
foreign  nations  to  command.  In  other  words,  we  obtain  our  gold 
cheaper,  while,  as  involved  in  this  result,  the  scale  of  industrial 
remuneration,  measured  in  gold,  is  higher  with  us  than  with  them. 
All  this,  I  say,  is  the  consequence  of  the  great  and  exceptional 
advantages  possessed  by  this  country  in  certain  departments  of 
industry.  We  have  here  the  explanation  of  our  cheap  gold,  but  not 
of  our  high  scale  of  prices.^  The  explanation  of  the  latter  phe- 
nomenon lies  in  the  fact  that  those  industrial  advantages  are  not 
general,  but  confined  to  a  few  departments  of  production.  Suppos- 
ing that  they  extended  over  the  whole,  or  the  greater  portion,  of 
our  industrial  field,  our  position  would  resemble  that  of  some  of  the 
Australian  colonies;  and  we  should,  along  with  cheap  gold,  have  a 
low  scale  of  general  prices.  In  fact,  however,  the  case  is  otherwise. 
We  are  in  the  position  of  an  old  country.  Our  land  has  all  long 
since  been  appropriated,  and,  to  supply  us  with  food,  even  very 
inferior  qualities  of  soil  have  been  brought  under  the  plow,  and 

iThis  part  of  the  problem  has  been  ably  worked  out  by  Mr.  Senior,  in  his 
well-known    Essay,  already   referred   to,  "On    the   Cost   of   Obtaining  Money." 

-Points  which  Mr.  Senior  omitted  to  discriminate,  as  Mr.  Mill  has  pointed 
out. 


76  CAIRNES 

are  cultivated  at  high  cost.  Food  and  provisions  of  all  sorts,  conse- 
quently, are  dear ;  so  also  is  house  accommodation,  and  in  general 
all  those  things  which  can  not  easily  be  made  the  subject  of  inter- 
national commerce.  In  these  respects  we  enjoy  no  special  advan- 
tages over  other  nations :  in  obtaining  gold,  however,  as  has  been 
shown,  we  do  possess  such  advantages.  Gold,  therefore,  with  us 
exchanges  in  larger  proportion  against  all  this  class  of  commodities 
than  in  other  countries ;  but  this  is  only  in  other  words  to  say  that 
the  scale  of  prices  over  this  area  of  exchange  is  higher  here  than  in 
them.  High  prices,  thus,  in  England  are  a  consequence  of  cheap 
gold ;  and  our  cheap  gold  enables  us  to  command,  on  terms  propor- 
tionally favorable,  the  products  of  other  countries.  But  we  should 
equally  enjoy  this  advantage,  while  we  should  also  enjoy  others 
in  addition,  if,  having  our  gold  as  cheap  as  now,  our  scale  of  prices 
was  at  the  same  time  as  low  as  in  other  countries ;  for  this  would 
imply  that  our  industry  was  as  productive  in  all  its  departments 
as  in  those  through  which  we  obtain  our  gold.  It  can  not,  there- 
fore, be  said  that  high  prices  are  in  themselves  advantageous  to  a 
country :  nevertheless,  in  so  far  as  they  are  an  indication  of  cheap 
gold,  they  are  an  evidence  that  the  country  in  which  they  exist 
occupies  a  position  of  vantage  in  the  world  of  commerce,  and  high 
prices  will  therefore,  under  such  circumstances,  generally  be  accom- 
panied with  commercial  prosperity  and  large  accumulated  wealth. 
There  is  just  one  exception  to  this  statement.  It  occurs  where  the 
scale  of  prices  is  raised  through  the  operation  of  a  protective  tariff. 
Gold  might,  in  this  case,  be  cheap,  and  yet  none  of  the  advantages 
of  cheap  gold  would  follow ;  for,  as  I  have  explained,  it  is  only 
through  foreign  trade  that  those  advantages  are  realized,  and  just 
in  so  far  as  Protection  is  operative,  the  country  maintaining  it  will 
be  excluded  from  foreign  trade.  Countries,  therefore,  in  which 
prices  are  kept  high  by  Protection,  are  in  the  singular  position  of 
securing  cheap  gold,  subject  to  the  condition  that  it  shall  not  be 
spent  in  the  only  market  where  advantage  would  arise  from  its 
cheapness. 

§  2.  So  much  I  have  thought  it  worth  while  to  say  on  the  subject 
of  high  and  low  prices.    I   now   turn   to  another  topic,  also  much 


ON  SOME  MINOR  TOPICS  77 

implicated  in  commercial  discussions,  and  on  which  some  strange 
notions  would  seem  to  be  afloat.  That  a  nation  is  enriched  by  its 
foreign  trade  is  mostly  taken  for  granted,  and  with  good  reason ; 
but  what  is  the  nature  of  the  gain?  and  by  what  standard  are  we 
to  measure  its  amount  ?  We  are  all  familiar  with  the  doctrine  of  the 
Balance  of  Trade,  according  to  which  celebrated  theory  the  gain  on 
foreign  trade  was  measured  by  the  excess  of  exports  over  imports, 
and  consisted  in  the  gold  and  silver  which  were  supposed  to  come 
from  foreign  countries  in  liquidation  of  the  balance.  That  view  is 
now,  I  suppose,  pretty  generally  abandoned.  But  I  have  observed 
of  late,  both  in  the  press  and  among  parliamentary  speakers,  a 
curious  modern  inversion  of  the  ancient  doctrine.  I  have  seen  it 
laid  down,  with  much  exultation  over  the  ignorance  of  our  ancestors, 
that  the  gain  in  our  foreign  commerce,  instead  of  being  measured, 
as  was  formerly  thought,  by  the  excess  of  exports  over  imports,  is, 
on  the  contrary,  measured  by  the  excess  of  imports  over  exports. 
A  contributor  to  an  important  provincial  paper,  writing  some  time 
since  under  the  influence  of  this  notion,  calculated  that  the  gain 
of  England  from  her  foreign  trade  amounted  to  about  £100,000,000 
sterling ;  this  being  about  the  amount  by  which  her  imports  in  that 
year  exceeded  her  exports.  If  I  mistake  not,  it  was  a  part  of  the 
doctrine  that  this  sum  represented  the  profits  of  our  merchants 
engaged  in  foreign  trade.  The  reader  who  has  followed  the  explana- 
tions given  in  a  former  chapter  of  the  causes  governing  the  relation 
of  exports  and  imports  in  the  external  trade  of  countries  will  not 
need  any  further  refutation  of  this  extravagant  notion.  I  may  just 
add,  as  a  sufficient  reductio  ad  absurdum,  that,  inasmuch  as  the 
external  trade  of  many  prosperous  communities  exhibits  a  constant 
excess  of  exports  over  imports,  it  would  follow  from  this  view  that 
all  such  communities  are  undergoing  a  steady  course  of  impoverish- 
ment, and  that  those  of  their  inhabitants  who  engage  in  foreign 
trade  only  incur  losses  on  their  investments.  Such  speculations  show 
how  little  the  Political  Economy  of  some  among  us  is  in  advance  of 
the  ideas  of  the  seventeenth  century. 

Another  method  by  which  it  is  frequently  attempted  to  estimate 
the  gain  on  foreign  trade  proceeds  on  the  assumption  that  such 
gain  is  identical  with  the  mercantile  profits  accruing  upon  the  capital 


78  CAIRNES 

thus  invested.  This  view  is  only  less  absurd  than  the  former 
in  not  identifying  the  amount  of  mercantile  profit  with  the  balance 
on  the  external  trade.  According  to  it,  if  we  suppose  the  total 
capital  embarked  in  the  foreign  trade  of  Great  Britain  to  be  £500,- 
000,000,  and  the  rate  of  profit  £10  per  cent.,  it  would  follow  that 
the  gain  to  the  country  upon  her  foreign  trade  would  be  repre- 
sented by  £50,000,000  sterling.  This  way  of  regarding  the  subject 
is,  I  imagine,  sufficiently  prevalent  among  our  mercantile  classes ; 
but  it  only  affords  a  proof  the  more  how  very  little  those  classes 
have  yet  contrived  to  appropriate  of  the  elementary  truths  of  the 
science  in  whose  name  they  so  often  speak.  The  notion  betrays  a 
fundamental  misconception  of  the  nature,  not  merely  of  foreign 
trade,  but  of  all  trade,  and  of  the  end  and  purpose  for  which  it 
exists.  "Consumption,"  says  Adam  Smith,  "is  the  end  and  purpose 
of  all  production."  .  .  .  "The  maxim,"  he  observes,  "is  so  per- 
fectly self-evident  that  it  would  be  absurd  to  attempt  to  prove  it." 
Not  less  self-evident  is  it  that  the  end  and  purpose  of  all  trade  is 
to  cheapen  production,  and  so  to  minister  more  effectually  to  the 
ultimate  end— the  need  of  the  consumer.  But  the  gain  upon  trade 
must  surely  consist  in  the  degree  in  which  it  fulfills  its  proper  end 
— must,  therefore,  consist,  not  in  the  profits  of  traders,  but  in  the 
advantage  which  it  brings  to  those  for  whose  behoof  the  trader 
exists.  It  is  true  the  trader's  motive  when  engaging  in  trade  is  to 
make  a  profit ;  but  not  the  less  is  his  raison  d'etre  as  a  trader  to 
minister  to  the  wants  of  others.  He  must  have  his  profit,  or  he  will 
cease  to  trade ;  but  his  profit,  though  an  incident  of  the  good  result- 
ing from  his  office,  is  not  the  measure  of  it.  The  measure  of  the 
service  which  he  renders — of  the  importance  of  his  function — is 
not  this,  but  the  benefit  he  confers  on  the  community  whose  servant 
he  is ;  and  this  benefit  is  great  in  proportion  to  his  success  in 
serving  the  consumer ;  in  other  words,  in  cheapening  commodities 
— in  diminishing  the  obstacles  which  exist  to  the  satisfaction  of 
human  wants.  Nothing,  therefore,  can  betray  a  more  profound 
misconception  of  the  true  nature  of  trade  and  the  purpose  for  which 
it  exists  than  to  represent  the  advantages  derivable  from  it  as 
measured  by  the  profits  of  the  agents  who  carry  it  on.  It  would  be 
just  as  reasonable  to  represent  the  advantages  of  learning  as  meas- 
ured by  the  salaries  of  teachers. 


ON  SOME  MINOR  TOPICS  79 

What,  then,  is  the  true  criterion  of  the  gain  on  foreign  trade? 
I  reply,  the  degree  in  which  it  cheapens^  commodities,  and  ren- 
ders them  more  abundant.  Foreign  trade  not  merely  supplies  us 
with  commodities  more  cheaply  than  we  could  produce  them  from 
our  own  resources,  but  supplies  us  with  many  commodities  which, 
without  it,  we  could  not  obtain  at  all.  The  degree  in  which  it  does 
this  is  the  true  criterion  and  measure  of  the  gain,  but  it  is  a  meas- 
ure which  palpably  does  not  admit  of  being  applied  in  practice. 
To  determine  the  amount  or  extent  of  the  advantage  derivable  from 
foreign  trade  is,  and,  I  venture  to  say,  must  ever  be,  an  absolutely 
insoluble  problem — a  truth  which  will  be  sufficiently  apparent  if 
we  advert  to  some  of  the  data  on  which  its  solution  depends. 

As  I  have  just  said,  one  portion  of  the  gain  derived  from  foreign 
trade  consists  in  the  supply  it  yields  us  of  commodities  not  capable 
of  being  produced  in  our  own  country.  Great  Britain,  for  example, 
obtains  in  this  way  her  tea  and  sugar;  and  it  will,  perhaps,  be 
thought  that  the  satisfaction  derived  from  the  consumption  of  these 
articles  constitutes  the  gain  to  the  British  consumer  upon  so  much 
of  our  foreign  trade.  Even  if  this  were  so,  it  is  pretty  evident  that 
the  satisfaction  in  question  is  not  capable  of  quantitative  measure- 
ment. But,  in  point  of  fact,  the  problem  is  far  more  complicated 
than  such  a  solution  supposes ;  for  it  must  not  be  forgotten  that, 
in  the  event  of  our  being  excluded  from  the  countries  which  furnish 
us  with  tea  and  sugar,  we  should  have  at  our  disposal  all  the  capital 
now  employed  in  producing  the  commodities  in  exchange  for  which 
tea  and  sugar  are  now  obtained.  This  capital  would  then  be  avail- 
able for  the  production  of  substitutes,  or,  in  case  none  were  forth- 
coming, for  the  production  of  other  things ;  and  the  gain  upon 
this  portion  of  our  foreign  trade  would  be  represented  by  the 
difference  between  the  advantage  conferred  on  the  community  by 
its  present  supply  of  tea  and  sugar,  and  that  which  it  would  receive 
from  the  substitutes,  or  other  things,  whatever  these  might  be, 
which,  in  their  absence,  we  might  produce  from  our  own  resources. 
But,  as  we  have  no  means  of  measuring  accurately  the  satisfactions 
which  we  at  present  enjoy  from  the  consumption  of  the  articles  in 

1  The  reader  will  bear  in  mind  the  sense  in  which  I  use  "  cheapen  "  ;  viz.,  as 
equivalent  to  lowering  cost,  to  reducing  the  sacrifices  involved  in  procuring  a 
commodity. 


8o  CAIRNES 

question,  and  still  less  of  measuring  those  which  we  might  derive 
from  such  things  as  in  their  absence  we  might  provide  ourselves  with, 
it  is  evident  that  an  accurate,  or  even  an  approximate,  determination 
of  the  advantages  accruing  to  us  from  our  foreign  commerce, 
so  far  at  least  as  its  function  is  to  furnish  us  with  articles  we 
can  not  ourselves  produce,  is  absolutely  beyond  our  reach.  All 
we  can  say  with  confidence  is  that  the  tastes  and  wants  which  are 
.  now  satisfied  through  this  service  of  foreign  commerce  are  of  a 
more  imperious  kind  than  any  which  our  labor  and  capital,  employed 
upon  the  materials  furnished  to  us  by  our  own  country,  are  capable 
of  satisfying ;  since,  if  it  were  not  so,  so  much  of  our  foreign  trade 
as  it  represents  would  not  exist.  We  are  thus  justified  in  concluding 
that  there  is  a  real  gain,  but  beyond  this  our  data  do  not  carry  us. 
We  are  absolutely  without  the  means  of  estimating  its  amount. 

So  much  for  one  portion  of  our  foreign  trade.  With  regard  to 
that  more  important  part  of  it,  of  which  the  function  is,  not  to 
supply  us  with  commodities  which  we  are  incapable  of  producing, 
but  to  cheapen  those  which  we  might  produce,  the  case  might  here 
seem  to  be  more  manageable.  In  order  to  ascertain  the  gain  on 
this  part  of  our  trade,  the  data  necessary  would  be,  first,  a  deter- 
mination of  the  cost  at  which  we  actually  obtain  our  imported 
articles  of  the  class  under  consideration ;  and,  secondly,  a  deter- 
mination of  that  at  which  we  could  produce  them  if  thrown  upon 
our  own  resources.  The  difference  would  represent  what  we  gain 
by  importation,  and  the  data  might  seem  to  be  not  beyond  our 
reach.  When,  however,  we  come  to  look  closely  at  the  problem,  we 
find  ourselves  once  more  estopped  by  insuperable  difficulties ;  for, 
to  take  a  simple  illustration — on  the  supposition  that  we  import 
from  foreign  countries  10,000,000  quarters  of  wheat,  how  are  we  to 
estimate  the  gain  which  the  nation  derives  from  obtaining  so  much 
of  its  food  in  this  way?  We  know,  indeed,  or  we  may  ascertain, 
at  least  approximately,  the  cost  in  labor  and  abstinence  of  the 
10,000,000  quarters  of  wheat  which  we  import.  It  would  be  repre- 
sented by  the  cost  of  the  commodities  which  we  export  to  pay  for 
them.  We  know  again,  or  we  may  ascertain,  the  cost  at  which 
wheat  is  now  raised  in  this  country,  when  grown  under  conditions 
which  determine  its  average  selling  price.  But  what  we  do  not 
know,  and  what  we  have  no  possible  means  of  ascertaining,  is  the  cost 


THE  AUSTRALIAN  EPISODE  8i 

at  which  an  addition  of  10,000,000  quarters  to  our  present  home 
supply  could  be  produced  from  the  soil  of  Great  Britain.  Inasmuch 
as,  in  order  to  produce  this  quantity,  it  would  be  necessary  to  bring 
under  cultivation  for  wheat  soils  far  inferior  to  any  now  devoted 
to  that  purpose,  we  may  be  quite  confident  that  the  cost  would  be 
immensely  greater  than  any  portion  of  our  home  supply  is  now 
raised  at ;  immensely  greater,  therefore,^  than  that  at  which  we 
obtain  the  quantity  now  imported ;  but  by  how  much  greater  we 
are  absolutely  without  the  means  of  determining — I  might  almost 
say,  of  conjecturing ;  and  it  is  evident  that  the  same  argument 
applies  with  equal  force  to  every  article  of  raw  produce  that  we 
import.  It  follows  that,  with  regard  to  commodities  capable  of 
being  produced  in  the  country,  no  less  than  with  regard  to  those 
which  can  only  be  obtained  from  foreign  sources,  the  data  for  as- 
certaining the  quantum  of  gain  accruing  to  us  from  foreign  trade 
are  absolutely  wanting.  We  know  the  nature  of  the  gain :  it  con- 
sists in  extending  the  range  of  our  satisfactions,  and  in  cheapening 
the  cost  at  which  such  as  in  its  absence  would  not  be  beyond  our 
reach  are  obtained ;  and  we  know  that  the  amount  which  it  brings 
to  us  under  each  of  these  categories  can  not  but  be  very  great ; 
but  beyond  this  indefinite  and  vague  result  our  data  do  not  enable 
us  to  pass. 

CAIRNES:  THE  AUSTRALIAN  EPISODE^ 

In  the  discussions  which  have  taken  place  respecting  the  prob- 
able consequences  of  the  Californian  and  Australian  gold  discov- 
eries, there  is  a  branch  of  the  general  question  which  has  not  yet 
received  from  economists  that  degree  of  attention,  to  which  from  its 
scientific  importance  it  seems  to  be  entitled.  I  allude  to  the  effects 
produced  by  those  events  in  the  countries  which  have  been  the 
scene  of  their  occurrence.  In  the  great  world  of  commerce,  the  ac- 
tion of  the  new  money  for  the  most  part  escapes  notice  amid  the 

iHome  and  imported  wheat,  quality  for  quality,  selling  in  the  same  market 
at  the  same  price,  and  the  average  price  of  home  wheat  being  governed  by  the 
cost  of  producing  the  most  costly  portion,  it  follows  that  this  cost  will  represent 
to  us  the  cost  of  the  imported  portion  of  our  wheat  supply. 

2  John  Elliot  Cairnes  (1823-1875),  in  Frazer's  Magazine,  1859,  reprinted  in 
"Essays  in  Political  Economy,"  pp.  20-49. 


82  CAIRNES 

variety  and  complexity  of  the  phenomena  in  which  it  is  involved. 
The  area  over  which  the  increasing  supplies  have  to  act  is  immense, 
the  extraneous  incidents  affecting  the  course  of  their  diffusion  are 
numerous,  and  the  real  tendency  of  the  movement  is  thus  in  these 
cosmopolitan  transactions  not  easily  discoverable.  But  within  the 
more  limited  sphere  of  the  auriferous  countries  this  is  not  the  case. 
The  gold  discoveries  have  there  been  the  predominant  influence, 
and  being  less  controlled  by  circumstances,  the  real  character  of 
the  new  agencies  and  the  results  to  which  they  are  leading  come 
distinctly  and  prominently  into  view.  California  and  Australia, 
during  the  period  of  their  auriferous  history,  furnish  us  with  what 
Bacon  would  call  "an  ostensive  or  predominant  instance"  of  the 
action  of  such  agencies,  showing  their  nature  (to  borrow  his  lan- 
guage) "naked  and  palpable,  and  even  in  its  exaltation,  or  in  the 
highest  degree  of  its  power — that  is  to  say,  emancipated  or  freed 
from  impediments,  or  at  least,  by  force  of  its  native  energy,  domi- 
nating over  these,  suppressing  and  coercing  them."^  Hence,  by 
studying  the  effects  of  the  gold  discoveries  in  these  countries,  we 
may  gain  a  clearer  and  steadier  view  of  the  real  nature  of  the 
causes  which  are  at  work  than  we  are  likely  to  obtain  from  the 
more  extended  and  complicated  transactions  of  general  commerce. 
By  tracing  the  events  which  are  there  presented,  we  may  be  guided 
to  conclusions  which  (if  the  illustration  be  allowed)  may  serve  as 
a  sort  of  economic  chart  of  the  new  monetary  influences — a  chart 
which,  though  it  may  be  drawn  upon  an  exaggerated  scale,  will  all 
the  more  clearly  indicate  the  true  direction  of  the  currents,  and  the 
ultimate  goal  whither  they  are  bearing  us. 

With  this  view,  I  propose  in  the  following  paper  to  examine  the 
effects  of  the  gold  discoveries  in  Australia  on  its  trade,  industry, 
and  pecuniary  relations.  The  course  of  events  in  California  during 
its  auriferous  history  has  been  extremely  similar,  and  the  descrip- 
tion of  the  movement  in  the  former  country  will  in  its  main  features 
be  found  applicable  to  the  latter. 

Regarded  in  its  economic  aspects,  the  discovery  of  gold  in  Aus- 
tralia may  be  thus  briefly  described :  It  was  an  occurrence  by  which 
a  common  labourer  was  enabled,  by   means  of  a  simple  process 

1  Novum  Organon,  Lib.  II,  Aph.  24. 


THE  AUSTRALIAN  EPISODE  83 

requiring  for  its  performance  little  capital  or  skill,  to  obtain  about 
a  quarter  of  an  ounce  of  gold — in  value  about  £1  sterling — on 
an  average  in  the  day.^  This  is  the  fundamental  fact  from  which  the 
remarkable  series  of  events  which  we  have  lately  been  contemplating 
took  its  rise,  and  to  which  the  whole  movement  following  upon 
the  gold  discoveries  is  ultimately  traceable.  The  immediate  effect 
was  a  general  disorganization  of  industry  throughout  the  Australian 
colonies.  The  ordinary  pursuits  of  the  place  were  for  a  time  en- 
tirely suspended ;  and  the  imaginations  and  hopes  of  the  community 
outstripping  even  the  marvellous  realities  of  the  case,  the  whole 
industrial  population  rushed  as  by  a  single  impulse  to  the  gold- 
fields.  The  gold  fever,  however,  in  this  its  first  and  full  intensity, 
was  not  of  long  duration.  Actual  trial  soon  reduced  the  extrava- 
gant expectations  raised  by  the  first  announcements  to  a  more 
sober  and  correct  appreciation  of  the  true  conditions  of  the  dis- 
covery. Those  who  had  overrated  the  gain,  as  well  as  those  whose 
constitution  and  habits  unfitted  them  for  the  toils  and  exposure  of 
gold-digging,  and  who  did  not  fall  victims  to  their  mistake,  returned 
after  a  short  trial  to  their  former  occupations.  The  extraordinary 
excitement  subsided ;  but  in  the  meantime  a  change  had  taken  place 
in  the  conditions  of  Australian  industry,  a  new  and  vigorous  branch 
of  production  had  struck  root,  overshadowing  all  the  old  occupations 
of  the  country  and  entirely  superseding  many  of  them,  and  a  new 
monetary  regime  had  been  inaugurated. 

The  immediate  result  of  the  change  was  a  general  rise  of  money 
wages  throughout  the  country.  Formerly  the  wages  of  common 
labour  in  Australia  had  ranged  from  3  s.  to  5  s.  a  day.  The  same 
labour  was  now,  by  washing  the  auriferous  sand,  capable  of  pro- 
ducing gold  worth  20  s.  a  day.  It  followed  as  a  necessary  conse- 
quence that,  other  things  being  equal,  hired  labourers  would  not 
work  for  less.  Other  things  indeed  were  not  equal.  The  toil  of 
gold-digging  was  severe,  its  results  were  precarious,  and  the  further 
the  removal  from  the  coast  the  higher  was  the  price  of  provisions. 
All  these  circumstances  influenced  wages  in  different  occupations 
and  in  different  localities ;   but,  making  allowance  for  these,  the 

■•  Correspondence  Relative  to  the  Late  Discoveries  of  Gold  in  Australia, 
pp.  32,  SI.    Presented  to  Parliament  February,  1852. 


84  CAIRNES 

standard  of  pecuniary  remuneration  in  Australia  was  henceforth 
the  rate  of  earnings  on  the  gold-fields. 

During  the  two  years  immediately  following  the  first  discov- 
eries, this  standard  continued  at  the  high  point  above  indicated — 
namely,  about  a  quarter  of  an  ounce  of  gold  per  man  each  day, 
equal  to  about  £i  sterling;  but  towards  the  close  of  1853  a  great 
decline  in  the  proceeds  of  gold-digging  took  place.  The  cream  of 
the  richest  auriferous  deposits  had  by  this  time  been  skimmed 
away ;  and  it  was  henceforth  necessary  to  dig  deeper  for  materials 
which,  when  reached,  proved  of  inferior  quality.  The  Commis- 
sioners appointed  in  the  following  year  to  report  on  the  gold-fields 
accordingly  describe  a  great  falling  off  at  this  time  from  the 
richness  of  the  early  returns ;  ^  and  although  many  new  gold-fields 
have  since  been  opened  the  high  average  standard  of  the  early 
discoveries  has  not  again  been  reached.-  During  the  two  years 
just  passed  (1857  and  1858),  the  rate  of  gold  earnings  per  man 
has  not  exceeded  on  an  average  ten  shillings  a  day — a  decline 
of  one-half  from  the  early  returns.  On  the  whole,  we  may  say 
that  during  the  first  and  most  productive  period  of  gold-digging, 
the  standard  of  money  wages  in  Australia  rose  in  rather  more 
than  a  fourfold  proportion  as  compared  with  the  pre-gold  times, 
and  that  during  the  last  five  years  this  proportion  has  been 
reduced  by  one-half ;  so  that  money  wages  in  Australia  are  at 
the  present  time  (1859)  rather  more  than  double  those  which 
formerly  prevailed.^ 

But  this  rise  in  the  pecuniary  remuneration  of  the  labourer  in- 
volved further  consequences.  The  Australian  employer  could  not 
continue  to  pay  quadruple  or  double  rates  to  his  workmen 
while  the  commodities  which  he  sold  remained  at  their  former 
price.  In  order  to  the  maintenance  of  his  profit,  it  was  necessary 
that  the  price  of  Australian  productions  should  rise  in  proportion 
as  wages  had  risen ;  and  this  result  accordingly  followed  in  due 
course. 


1  Further  Papers  Relative  to  the  Discovery  of  Gold  in  Australia,  p.  55. 
Presented  to  Parliament  February,  1856. 

-Westgarth,  Victoria   (1857),  p.   171. 

^Ibid.,  p.  150.  (Since  i8sq  the  rates,  with  occasional  variations,  have  on 
the  whole  slightly  declined,  following  the  course  of  gold  production  (1872).) 


THE  AUSTRALIAN  EPISODE  8$ 

The  advance,  however,  in  money  wages  and  prices  which  these 
circumstances  necessitated,  though  rapid,  was  not  instantaneous.^ 
For  more  than  a  year  after  the  gold  discoveries  had  occurred,  it 
was  held  sensibly  in  check  by  the  peculiar  state  of  the  local 
currencies.  For  there  was  at  this  time  no  mint  in  Australia ;  the 
increased  requirements  for  coin  could  only  be  met  by  a  transmis- 
sion of  bullion  to  London,  there  to  be  coined,  and  afterwards  re- 
imported  ;  and  this  process  required  from  six  to  eight  months  at 
the  least  for  its  accomplishment.  Pending  the  arrival  of  the  new 
coins,  prices  were  not  indeed  prevented  absolutely  from  rising ;  for 
numerous  expedients  were  in  their  absence  freely  resorted  to  for 
supplying  the  place  of  the  ordinary  currency ;  -  but  nevertheless 
prices  were,  by  the  straitness  of  the  circulation,  kept  very  consid- 
erably under  their  natural  level,  as  determined  by  the  cost  of  gold, — 
a  fact  which  was  sufficiently  proved  by  a  remarkable  fall  in  the 
price  of  gold  throughout  the  whole  of  this  period.^  The  arrival, 
however,  of  sovereigns  in  large  quantities  from  England,  in  the 
winter  of  1852-53,  quickly  put  an  end  to  this  exceptional  state  of 
the  markets.  The  price  of  gold,  and  with  it  the  prices  of  other 
things,  rose  to  their  natural  level ;  and  pecuniary  rates  generally 
throughout  the  country  were  brought  permanently  into  conformity 
with  the  new  conditions  of  producing  gold. 

But  the  advance  in  general  prices,  which  was  thus  easily  and 
rapidly  effected  within  the  limited  area  of  the  gold  districts,  could 
by  no  means  be  accomplished  with  the  same  facility  amongst  the 
great  commercial  populations  of  the  world.  The  disturbance  of 
industrial  pursuits  in  the  larger  theatre,  though  resulting  in  an 
extensive  emigration,  was  yet,  in  comparison  with  the  general  busi- 
ness of  the  world,  inconsiderable,  while  the  supply  of  gold  required, 
in  order  to  render  possible  a  fall  in  its  value  over  so  large  an  area 
of  transactions,  was  immense.    The  necessary  conditions,  therefore, 

iSee  the  Table  of  Prices  contained  in  Mr.  Westgarth's  "Address  to  the 
Melbourne  Chambers  of  Council,"  given  in  the  Appendix  to  his  "Victoria,  or 
Australia  Felix"  (1853). 

2  Of  which  expedients  the  passing  of  the  Bullion  Act  by  the  government  of 
South  Australia  was  the  most  important. 

3A  fall  from  £3  17s.  loYzd.  per  ounce,  the  London  Mint  price,  to  60s., 
SOS.,  and,  it  is  stated,  in  some  instances  to  40s.  per  ounce.  See  the  Appendix  to 
Westgarth's  "Victoria,  or  Australia  Felix"  (1853). 


86  CAIRNES 

to  a  rise  in  general  prices  not  being  susceptible  of  speedy  ful- 
filment, money  rates  throughout  the  world  at  large  did  not,  and 
could  not,  advance  with  the  same  rapidity  with  which  they  advanced 
in  the  gold  countries.  A  divergence  of  local  prices  and  rates  in 
Australia  from  the  general  level  of  commercial  countries  has  been 
the  necessary  consequence, — a  divergence  which  has  altered  funda- 
mentally her  commercial  position  in  relation  to  the  rest  of  the 
world,  and  has  been  followed  by  a  series  of  changes  in  her  domestic 
industry  and  foreign  trade  which  I  shall  now  attempt  to  describe. 

The  great  staple  industry  of  Australia  has,  from  an  early  period 
in  the  history  of  the  colony,  been  her  cattle-farming;  the  advan- 
tages which  the  country  possesses  for  this  pursuit  in  her  extensive 
open  plains,  covered  with  rich  natural  grass,  being  unsurpassed  in 
any  part  of  the  world.  The  fruits  of  this  industry  are  the  usual 
pastoral  products,  of  which  butcher's  meat,  wool,  and  tallow  are 
the  principal.  Until  the  occurrence  of  the  remarkable  events  we 
are  considering,  the  two  latter  of  these  constituted  the  leading  com- 
modities of  the  foreign  trade  of  the  country.  For  the  former — 
butcher's  meat — as  it  was  unfit  for  a  distant  traffic,  she  was  com- 
pelled to  trust  for  a  market  to  the  local  population,  which  being 
extremely  limited,  the  supply  of  meat  was  with  difficulty  disposed 
of,  and  the  article  was  consequently  often  a  drug  in  the  colonial 
markets.  The  difficulty,  however,  thence  arising  to  the  pastoral  in- 
terest, was  met  by  the  conversion  of  a  large  portion  of  their 
meat  into  tallow,  and  by  the  starting  of  an  export  trade  in  this 
commodity.  By  this  means  the  several  branches  of  trade  connected 
with  pastoral  farming  in  Australia  were  placed  upon  a  sound  founda- 
tion, and  by  the  beginning  of  185 1  they  were  in  a  highly  flourishing 
condition.  But  in  the  summer  of  that  year  the  gold  discoveries 
occurred,  and  the  consequences  which  have  ensued  in  this  leading 
department  of  her  industry  have  been  not  a  little  remarkable. 

On  the  first  outbreak  of  the  gold  mania  in  1851,  the  pastoral  in- 
terest was  subjected  to  the  same  inconvenience  which  was  felt  by 
all  other  occupations  in  Australia.  The  minds  of  shepherds  and 
shearers  were  not  proof  to  the  attractions  which  had  acted  so 
powerfully  on  workmen  in  every  other  walk  of  industry,  and  the 
"squatting"  stations  were  for  a  time  abandoned  for  the  more 
enticing  pursuits  of  the  gold-fields.    As  the  only  means  of  obtaining 


THE  AUSTRALIAN  EPISODE  87 

the  requisite  supply  of  labour,  the  squatters  were  obliged  to  sub- 
mit to  the  same  advance  in  wages  which  at  this  time  took  place 
in  all  other  occupations.  But,  as  has  been  pointed  out,  a  rise  in 
money  wages  requires  (if  proiits  are  to  be  maintained)  a  correspond- 
ing rise  in  the  price  of  the  commodities  which  the  more  highly- 
priced  labour  produces.  This  necessary  rise  was  effected  without 
difficulty  in  articles  produced  in  Australia  for  domestic  consump- 
tion;  but  the  chief  product  of  the  pastoral  industry  was  wool,  and 
the  chief  market  for  wool  was  Europe,  in  which  a  fourfold  or  a 
twofold  rise  in  price — such  a  rise,  that  is  to  say,  as  would  have 
indemnified  the  Australian  farmer  for  the  advance  in  his  labour 
rates — was  simply  impossible,  or  at  the  least  could  only  have  been 
obtained  by  a  curtailment  of  supply,  which,  as  Europe  had  other 
resources  for  this  material  besides  the  Australian  sheep  farms,  it 
was  not  in  the  power  of  Australia  to  effect.  On  the  news,  therefore, 
of  the  gold  discoveries  reaching  this  country,  great  alarm  was  felt 
for  the  stability  of  this  trade.  Mr.  Lalor,  in  his  work  on  "Money 
and  Morals,"  strongly  urged  upon  Government  the  duty  of  assisting 
the  emigration  of  shepherds  with  a  view  to  supply  the  necessary 
labour.  But  supposing  this  were  done,  what  security  was  there 
that  the  emigrating  shepherds  would  not  follow  their  predecessors 
to  the  gold-fields?  In  truth  the  wool  trade  was  at  this  time  in 
serious  jeopardy.  It  has  been  saved  from  the  danger  that  was  im- 
pending through  a  circumstance  which,  in  the  first  excitement  of  the 
movement,  escaped  the  attention  of  observers — through  the  influ- 
ence, namely,  which  the  same  event  that  endangered  the  supply  of 
wool  has  exercised  on  other  branches  of  the  industry  to  which  wool 
belongs.  The  immense  immigration  which  followed  the  gold  dis- 
coveries created  a  sudden  demand  for  butcher's  meat ;  a  more  than 
quadruple  rise  in  the  price  of  meat  in  Australia  has  been  the 
consequence, — a  rise  which  has  covered  the  increased  outlay  on 
sheep-farming,  thus  providing  the  necessary  inducement  for  the 
continuance  of  the  supply  of  sheep,  and  therefore  of  wool.  The 
wool  trade  of  Australia  has  thus  been  preserved  from  extinction ; 
but  it  is  important  to  observe  that  it  is  now  upon  a  different  foot- 
ing from  that  on  which  it  formerly  stood.  Previous  to  the  gold 
discoveries,  while  wool  formed  the  leading  product  of  pastoral  in- 
dustry, the  extension  of  sheep-farming  depended  principally  on  the 


88  CAIRNES 

extension  of  the  demand,  chiefly  in  Europe,  for  this  article.  But 
since  that  event,  wool  has,  in  the  calculation  of  the  farmer's  proiits, 
become  subordinate  to  meat,  which  is  now  the  great  support  and 
mainstay  of  his  trade.  The  progress  of  pastoral  farming  will  there- 
fore in  future  be  governed,  not  by  the  requirements  of  Europe  for 
wool,  but  by  those  of  Australia  for  meat, — in  other  words,  by  the 
increase  of  the  colonial  population ;  and  as  this  cannot  be  expected 
to  keep  pace  with  the  general  demand  for  wool,  a  falling  off  in  the 
rate  of  increase  at  which  this  branch  of  industry  was  formerly 
progressing  may  accordingly  be  looked  for ;  indeed,  the  decline 
has  already  become  very  apparent.^ 

So  far  as  to  the  pastoral  industry  of  Australia.  Let  us  now  trace 
the  influence  of  the  gold  discoveries  upon  the  occupation  which, 
along  with  pastoral  pursuits,  forms  in  general  the  principal  re- 
source of  young  communities — agriculture. 

If  we  are  to  accept  the  very  high  authority  of  Humboldt,  the 
discovery  of  the  Australian  gold-fields  should  rather  assist  than 
hinder  the  progress  of  its  agriculture.  In  his  "Political  Essay  upon 
the  Kingdom  of  New  Spain,"  that  eminent  writer  thus  observes : 

"It  cannot  be  doubted  that,  under  improved  social  institutions, 
the  countries  which  most  abound  with  mineral  productions  will 
be  as  well  if  not  better  cultivated  than  those  in  which  no  such 
productions  are  to  be  found.  But  the  desire  natural  to  man  of 
simplifying  the  causes  of  everything  has  introduced  into  works  on 
political  economy  a  species  of  reasoning  which  is  perpetuated  be- 
cause it  flatters  the  mental  indolence  of  the  multitude.  The  depop- 
ulation of  Spanish  America,  the  state  of  neglect  in  which  the  most 
fertile  lands  are  found,  and  the  want  of  manufacturing  industry, 
are  attributed  to  the  metallic  wealth,  to  the  abundance  of  gold 
and  silver ;  as,  according  to  the  same  logic,  all  the  evils  of  Spain 
are  attributed  to  the  discovery  of  America,  or  the  wandering  race 
of  the  Merinos,  or  the  religious  intolerance  of  the  clergy ! 

"We  do  not  observe  that  agriculture  is  more  neglected  in  Peru 
than  in  the  province  of  Cumana  or  Gugana,  in  which,  however,  there 

^See  Westgarth,  Victoria  (1857),  p.  118;  and  Statistical  Abstract  of  the 
United  Kingdom  (1858),  p.  17.  (Since  this  was  written  the  trade  in  preserved 
meats  has  sprung  up,  and  this  will  of  course  enlarge,  and  already  has  perceptibly 
enlarged,  the  limits  of  the  wool  production  (1872).) 


THE  AUSTRALIAN  EPISODE  89 

are  no  mines  worked.  In  Mexico  the  best  cultivated  fields,  those 
which  recall  to  the  mind  of  the  traveller  the  beautiful  plains  of 
France,  are  those  which  extend  from  Salamanca  towards  Silao, 
Guanaxuato,  and  the  Villa  de  Leon,  and  which  surround  the  richest 
mines  of  the  known  world.  Wherever  metallic  seams  have  been 
discovered  in  the  most  uncultivated  parts  of  the  Cordilleras,  on 
the  isolated  and  desert  table  lands,  the  working  of  mines,  far  from 
impeding  the  cultivation  of  the  soil,  has  been  singularly  favourable 
to  it.  Travelling  along  the  ridge  of  the  Andes,  or  the  mountainous 
parts  of  Mexico,  we  everywhere  see  the  most  striking  examples  of 
the  beneficial  influence  of  the  mings  on  agriculture.  Were  it  not 
for  the  establishments  formed  for  the  working  of  the  mines,  how 
many  places  would  have  remained  desert?  how  many  districts 
uncultivated  in  the  four  intendancies  of  Guanaxuato,  Zacatecas, 
San  Luis  Potosi,  and  Durango,  between  the  parallels  of  21°  and  25°, 
where  the  most  considerable  metallic  wealth  of  New  Spain  is  to  be 
found?  If  the  town  is  placed  on  the  arid  side  or  the  crest  of  the 
Cordilleras,  the  new  colonists  can  only  draw  from  a  distance  the 
means  of  their  subsistence  and  the  maintenance  of  the  great  number 
of  cattle  employed  in  drawing  off  the  water,  and  raising  and  amal- 
gamating the  mineral  produce.  Want  soon  wakens  industry.  The 
soil  begins  to  be  cultivated  in  the  various  ravines  and  declivities  of 
the  neighbouring  mountains  wherever  the  rock  is  covered  with 
earth.  Farms  are  established  in  the  neighbourhood  of  the  mine. 
The  high  price  of  provisions,  from  the  competition  of  the  purchasers, 
indemnifies  the  cultivator  for  the  privations  to  which  he  is  exposed 
from  the  hard  life  of  the  mountains.  Thus  from  the  hope  of  gain 
alone,  and  the  motives  of  mutual  interest,  which  are  the  most 
powerful  bonds  of  society,  and  without  any  interference  on  the 
part  of  the  Government  in  colonization,  a  mine,  which  at  first 
appeared  insulated  in  the  midst  of  wild  and  desert  mountains, 
becomes  in  a  short  time  connected  with  the  lands  which  have  long 
been  under  cultivation."^ 

It  seems  unquestionable  that,  in  the  manner  described  by  Hum- 
boldt in  the  above  passage,  a  discovery  of  the  precious  metals,  by 
attracting  people  to  a  locality  otherwise  undesirable,  or  of  which 
the  other  recommendations  were  previously  unknown,  may  hasten 

iVol.  II,  pp.  405-408. 


go  CAIRNES 

the  progress  of  agriculture  over  the  earth,  or  may  lead  to  the  culti- 
vation of  districts  which,  but  for  such  discoveries,  might  for  ever 
have  remained  barren ;  nor  will  anyone  dispute  the  opinion  of  so 
competent  a  witness  that  the  neglect  of  agriculture  in  some  of  the 
States  of  Spanish  America  was  due  in  a  large  degree  to  defects 
in  their  social  institutions ;  but,  accepting  thus  far  the  opinion  of 
Humboldt,  I  yet  venture  to  question  the  doctrine  (for  to  this  length 
does  the  passage  I  have  quoted  seem  to  go)  that,  speaking  with  refer- 
ence to  a  country  in  which  occupation  has  been  effected  and  society 
established,  the  possession  of  mineral  treasures  is  favourable,  or  can 
be  otherwise  than  unfavourable,  to  the  cultivation  of  the  soil.  It  is  one 
of  the  best  established  principles  of  economic  science — the  principle 
on  which  the  whole  theory  of  foreign  trade  is  based — -that  the  pos- 
session by  a  country  of  any  extraordinary  advantage  in  production 
operates,  in  proportion  to  the  extent  of  the  advantage,  as  a  pre- 
mium against  all  other  industrial  pursuits.  And  the  grounds  of  the 
principle  are  sufficiently  obvious ;  for  the  possession  of  exceptional 
facilities  in  production  makes  it  clearly  the  interest  of  the  country 
which  enjoys  them  to  satisfy  its  wants  for  other  things,  rather 
through  the  medium  of  an  exchange  with  other  nations  of  the 
article  to  which  such  special  facilities  apply,  than  by  the  direct 
production  of  commodities  in  raising  which  the  country  has  no 
special  advantage.  And  this  being  the  general  principle  which  regu- 
lates foreign  exchange,  it  is  one  which,  from  their  portability  and 
the  universality  of  the  demand  for  them,  applies  to  the  precious 
metals  in  an  especial  degree.  I  therefore  find  it  impossible  to 
believe  that  the  mineral  resources  of  the  Spanish  American  States 
did  not  exercise  on  these  countries  an  influence  prejudicial  to  the 
progress  of  their  agriculture,  and  that  these  were  not  among  the 
causes  which  contributed  to  that  backward  state  of  cultivation 
which  Humboldt  notices  and  describes. 

And  this  conclusion  is  entirely  confirmed  by  the  recent  experi- 
ence of  Australia.  It  is  not  indeed  contended  that  the  discovery  of 
mineral  treasures  in  that  country  has  not  given  an  impulse  to  cul- 
tivation by  hastening  its  general  settlement,  in  the  same  manner 
as  in  the  metalliferous  districts  of  America.  What  I  contend  for 
is,  that,  the  country  being  once  occupied  and  settled,  the  presence  of 
rich  gold-fields  must  operate  unfavourably  upon  its  agriculture,  or, 


THE  AUSTRALIAN  EPISODE  91 

to  put  the  same  point  differently,  that  the  area  of  cultivation,  under 
the  influence  of  this  cause,  will  be  confined  within  limits  short  of 
those  which  it  would  have  attained,  had  the  community  reached 
the  same  stage  of  advance  under  different  economic  conditions ;  and 
this,  I  think,  is  sufficiently  proved  by  the  recent  history  of  Australia, 
— a  history  which  exhibits  the  strange,  and  I  believe  unprecedented, 
spectacle  of  a  country,  possessing  an  immense  unoccupied  territory, 
and  a  soil  of  more  than  average  fertility,  importing  more  than 
one-half  its  food.^ 

I  am  quite  aware,  indeed,  that  other  causes  besides  the  gold 
discoveries  are  responsible  for  the  past  history  of  agriculture  in 
Australia — more  particularly  a  land  system  contrived  with  singular 
ingenuity  to  cramp  and  pervert  the  natural  development  of  the 
country.  But  injurious  in  many  respects  as  may  have  been,  and 
may  still  be,  the  operation  of  this  system, — amongst  others,  in 
excluding  from  the  possession  of  land,  and  in  fact  driving  from 
the  colony,  a  class  of  small  proprietors  whom  on  social  grounds 
it  would  be  most  desirable  to  retain, — it  can  scarcely  be  maintained 
that  this  is  at  present  the  principal  cause  of  the  failure  of  Aus- 
tralian agriculture,  when  we  find  that  of  the  land  which  has  been 
sold  only  a  small  portion  has  been  brought  under  actual  cultivation.^ 
If  the  quantity  offered  in  the  market  is  insufficient  for  the  agricul- 
tural wants  of  the  country,  this  circumstance  would  only  give  an 
increased  value  for  this  purpose  to  the  land  which  has  been  sold ; 
and  yet  the  greater  portion  of  this  remains  as  yet  untilled.  It 
appears  to  me  that  this  state  of  things  can  only  be  explained  by 
reference  to  other  causes  than  the  restraints  of  the  land  system ; 
and  what  these  causes  are  our  former  reasonings  sufficiently  indi- 
cate. Obviously  they  are  to  be  found  in  the  new  money  regime 
introduced  by  the  gold  discoveries.  The  high  rate  of  wages  thus 
established,  being  peculiar  to  the  gold  countries,  places  the  Austra- 
lian farmer,  in  common  with  other  employers  of  Australian  labour, 
under  an  exceptional  disadvantage  in  competing  in  the  markets  of 
the  world,  and  compels  him,  therefore,  to  confine  cultivation  to  soils 
in  which  the  superior  richness  of  the  natural  agent  compensates 

iThe  Times  (Melbourne  correspondent),  February  3,  185S. 
^Westgarth,  Victoria   (1857),  p.  81;   Further  Papers  etc.    (February,   1856), 
p.  33  ;  Australian  and  New  Zealand  Gazette,  December  11,  1858,  p.  56S. 


92  CAIRNES 

the  cultivator  for  the  high  pecuniary  charges  with  which  he  has 
to  contend.  It  is  thus  that  the  gold-fields  of  Australia  present  a 
barrier  to  the  development  of  its  agricultural  resources — a  barrier 
which,  after  all  the  restrictions  of  the  land  system  are  removed,  must 
continue  to  operate,  and  which  will  probably  for  many  years  to 
come  render  its  richest  provinces  a  drain  upon  the  subsistence  of 
over-peopled  Europe,  instead  of  what  under  happier  conditions  they 
might  become, — liberal  contributors  towards  our  already  heavily- 
tasked  resources. 

Against  this  reasoning  it  will  perhaps  be  urged  that  agriculture 
has  made  considerable  progress  in  California,  which  has  already 
become  an  exporter  of  food.  This  is  true,  and  is  a  striking  proof 
of  the  fact  to  which  every  traveller  in  that  country  has  borne  testi- 
mony, the  extraordinary  fertility  of  the  Californian  soils, — a  fertility 
which  enables  agriculture  to  hold  its  own  even  against  the  competi- 
tion of  the  gold  mines.  The  fact,  however,  in  no  degree  invalidates 
the  principle  above  stated ;  it  only  proves  that  California  enjoys 
over  other  countries  an  advantage  in  raising  food,  up  to  a  certain 
point,  as  great  as  she  enjoys  in  obtaining  gold. 

The  extension  of  agriculture  in  Australia  has  thus,  though  stimu- 
lated for  the  moment,  suffered  a  real  check  from  the  gold  discov- 
eries ;  and  the  same  influence  has  been  felt  throughout  every 
branch  of  industry  in  that  country,  gold-mining  alone  excepted. 
The  premium  which  has  operated  against  sheep-farming  and  tillage 
has  operated  against  all  other  industrial  pursuits.  Many  districts 
in  the  northern  portion  of  New  South  Wales  are  represented  as 
favourable  to  the  growth  of  cotton.  ''In  Moreton  Bay,"  says  a 
colonial  writer,  "the  cotton-tree  grows  most  luxuriantly,  and  appears 
more  inclined  to  assume  a  perennial  form  than  in  even  the  most 
favoured  districts  of  America.  But,"  he  adds,  "up  to  the  present 
time  the  cost  (price)  of  cultivation  has  been  found  too  high  to 
make  the  business  of  cotton-growing  profitable."  Tin  and  anti- 
mony, we  are  told  by  another  authority,  abound  in  many  parts  of 
Victoria.  Some  of  the  richest  tin  ores  in  the  Ovens  districts  have, 
it  seems,  been  worked  to  some  profit ;  but  although  antimony  ore 
"appears  to  be  unlimited  in  quantity,"  "the  value  in  the  home 
market  (more  properly  the  price  of  raising  it  in  Australia)  will 
not  admit  of  its  being  touched  as  yet  by   the  eager   fingers  of 


THE  AUSTRALIAN  EPISODE  93 

commerce."^    Such  has  been  the  effect  on  the  industry  of  raw  prod- 
uce ;  and  in  manufacturing  industry  the  influence  of  the  gold  discov- 
eries has  been  still  more  complete  and  sweeping,   nothing  in  the 
nature  of  a  manufactured  product,  even  of  the  coarsest  kind,  being 
now  made  in  the  colony,  which  can  by  any  possibility  be  imported.^ 
As  a  proof  of  the  soundness  of  our  economic  knowledge,  it  is  in- 
teresting to  observe  that  all  this  has  happened  in  strict  conformity 
with  the  established  principles  of  economic  science.    According  to 
these  principles,  the  exchange  of  commodities  among  different  nations 
is  regulated,  not  by  the  absolute,  but  by   the  comparative,  cost 
of  the  commodities  exchanged^ — not  by  the  circumstance  that  the 
commodity  imported  from  a  foreign  country  may  be  produced  with 
less  labour  in  the  country  from  which  it  is  obtained  than  in  the 
country  which  imports  it,  but  by  this,  that  it  may  be  produced  by 
comparatively  less  labour  than  some  other  commodity,  which  is  also 
made  the  subject  of  exchange.    Thus  the  essence  of  the  gold  dis- 
coveries, regarded  economically,  consisted,  as  has  been  said,  in  the 
reduction  in  the  cost  of  raising  gold  which  was  thereby  effected, — 
a  reduction  which,  not  being  shared  by  other  countries,  involved 
a  change  in  the  comparative  costs  of  Australian  and  foreign  pro- 
ductions.   The  consequence  of  this  change  has  been  a  corresponding 
change  in  the  character  of  her  foreign  trade,  brought  about,  as  we 
have  seen,  through  an  action  on  money  wages.    Thus  Australia, 
instead  of  raising  her  own  corn,  as  under  ordinary  circumstances 
she  would  do,  imports  the  greater  portion  of  it.    If  we  ask  why  is 
this  ?  we  shall  be  told  that  the  price  of  labour  is  there  so  high  that 
she  cannot  afford  to  compete  with  foreign  countries.    This  is  true ; 
but  why  is  the  price  of  labour  so  high  in  Australia  ?    The  answer  is, 
because  the  cost  of  gold  is  so  low ;  the  rate  of  money  wages,  as  we 
have  seen,  always  rising  and  falling  as  the  facilities  of  producing 

^Westgarth,  Victoria  (1857),  pp.  11 2-1 13. 

2 "We  all  wear  imported  boots  and  shoes,"  says  the  Times'  correspondent, 
"and  it  is  cheaper  to  buy  new  than  to  get  the  old  mended." 

3 See  chapter  on  "Foreign  Trade,"  Ricardo's  Works;  also  Mill,  Principles  of 
Political  Economy,  Bk.  Ill,  chap.  xvii.  The  reader  must  observe  that  by  "cost" 
is  meant  the  real  difficulty  involved  in  the  production  of  a  commodity,  not  the 
amount  of  money  necessary  to  remunerate  the  labour  by  which  this  difficulty  is 
overcome.  The  only  commodity  of  which  the  cost  was  affected  by  the  gold 
discoveries  was  gold  ;  but  the  price  of  producing  everything  was  altered. 


94  CAIRNES 

gold  increase  or  diminish.^  The  true  explanation,  therefore,  of 
the  importation  of  corn  into  a  country  possessing  abundant  re- 
sources for  agriculture  is,  that  she  possesses  comparatively  still 
greater  resources  for  the  production  of  gold ;  so  that  she  finds  it 
profitable  to  obtain  her  corn  rather  through  the  medium  of  her 
cheap  gold,  than  by  its  direct  production.  And  the  same  explana- 
tion applies  to  every  circumstance  of  her  recent  trade:  e.g.,  pre- 
vious to  the  gold  discoveries  Australia  produced  her  own  cheese  and 
butter ;  she  now  largely  imports  these  articles.^  To  what  is  this 
change  due?  The  pastures  of  New  South  Wales  and  Victoria  offer 
unusual  facilities  for  dairy-farming,  and  these  facilities  have  not 
deteriorated  since  1851  :  the  cost  of  butter  now  is  the  same  as 
then ;  ^  and  yet,  with  these  resources  at  her  disposal,  Australia 
draws  her  chief  supplies  of  butter  from  Ireland, —  an  old  and 
densely  peopled  country.  The  explanation  of  this  singular  com- 
merce is  that  which  has  just  been  given.  The  natural  facilities 
possessed  by  Australia  for  raising  butter,  superior  though  they  are 
to  those  which  we  in  this  country  possess,  are  yet  not  so  much 
superior  as  her  facilities  of  raising  gold  are  superior  to  our  means 
of  commanding  it.  It  therefore  manifestly  becomes  her  interest 
to  turn  her  capital  and  labour  to  gold-mining,  rather  than  to  dairy- 
farming,  and  to  satisfy  her  requirements  for  butter  through  the 
medium  of  that  commodity  in  which  her  advantage  is  pre- 
eminent. By  following  this  course  she  enjoys  the  same,  or 
nearly  the  same,  advantage  over  other  countries,  in  obtaining  her 
butter  which  she  enjoys  in  obtaining  her  gold,  and,  strange  as  it 
may    seem,    secures    this   commodity    at    less    cost — at    a   smaller 

1  Which  shows,  by  the  way,  the  absurdity  of  attempting  to  measure  the  cost 
of  gold,  as  some  writers  have  done  (see  Tooke,  History  of  Prices,  Vol.  VI, 
p.  226),  by  the  pecuniary  outlay  necessary  to  its  production.  The  fact  is  that 
this  (so  far  as  gold  is  the  money  employed)  scarcely  ever  varies  ;  the  gold  price 
of  producing  gold  representing  merely  the  ratio  of  the  outlay  to  the  return,  or 
the  rate  of  profit,  so  that  if  price  be  taken  as  the  criterion  of  cost,  the  cost  of 
gold  would  never  vary  unless  so  far  as  the  rate  of  profit  varies. 

-The  sum  paid  by  the  colony  of  Victoria  alone  to  Great  Britain  on  this 
account  in  the  last  year  reached  the  large  amount  of  £800,000.  —  Australian  and 
New  Zealand  Gazette. 

^The  reader  will  bear  in  mind  the  distinction  between  the  cost  and  the  price 
of  production. 


THE  AUSTRALIAN  EPISODE  95 

sacrifice  of  ease  and  leisure — than  its  production  exacts  from  the 
Irish  farmer  who  raises  it.^ 

The  importance  of  thus  conceiving  the  commercial  effects  of  the 
gold  discoveries  is,  that  it  enables  us  at  once  to  perceive  the  pre- 
cise nature  and  bounds  of  the  advantage  which  Australia  and 
California  reap  from  their  gold-fields.  By  means  of  them  they  are 
enabled  to  obtain  their  gold  at  rather  less  than  one-half  the  sacrifice 
formerly  necessary ;  and,  therefore,  unless  so  far  as  the  purchasing 
power  of  the  metal  has  since  declined,  they  can,  through  the  medium 
of  it,  obtain  all  their  other  commodities  on  terms  proportionally 
easier.  We  have  seen  that,  as  regards  domestic  productions,  these 
have  all  risen  in  price  in  the  same  proportion  as  gold  has  fallen  in 
cost,  whence  it  follows  that,  so  far  as  this  portion  of  their  consump- 
tion is  concerned,  the  gold  countries  derive  no  advantage  from  their 
cheap  gold.  They  obtain  in  return  for  a  given  sacrifice,  twice  as 
much  gold  as  formerly,  but  they  also  pay  twice  as  much  for  every 
domestic  production.  With  their  foreign  trade,  however,  it  is 
otherwise.  Prices  throughout  the  world  have  not  risen  in  the  same 
degree  as  the  cost  of  gold  has  been  reduced ;  and  consequently 
upon  this  portion  of  their  dealings  Australia  and  California  are 
gainers, —  gainers  directly  in  proportion  to  the  reduced  cost  of  their 
gold,  modified  by  the  rise,  so  far  as  it  has  taken  place,  in  foreign 
prices.  A  given  exertion  of  labour  enables  them  to  command,  not 
only  more  gold,  but  more  of  every  other  thing  which  foreign  coun- 
tries can  supply.  It  is  thus  exclusively  in  the  foreign  branch  of  their 
trade  that  the  advantage  of  their  cheap  gold  resides:  it  is  only 
in  so  far  as  they  part  with  their  money  that  they  derive  from  it  any 
benefit ;  and  yet,  so  completely  in  Political  Economy  is  the  osten- 
sible at  variance  with  the  real,  and  so  inveterate,  consequently,  are 
the  prejudices  of  mere  experience,  that  the  cry  of  'Protection'  has 
been  heard  even  in  Victoria.  It  might,  perhaps,  shake  the  Victo- 
rian protectionist's  faith  in  his  doctrine,  if  he  would  reflect  that  his 
most  effectual  protection  against  the  foreigner  would  be  the  exhaus- 
tion of  his  own  gold-fields. 

Such  have  been  the  results  of  the  discovery  of  gold  on  the 
industry,   trade,   and  general   interests  of  Australia.    Let   us   now 

^A  possibility  which  was  foreseen  and  pointed  out  by  Ricardo. 


96  CAIRNES 

observe  the  light  which  these  conclusions  throw  on  the  more  general 
questions  connected  with  this  occurrence.  And,  in  the  first  place, 
as  to  the  extent  of  the  prospective  depreciation.  We  have  seen  that, 
in  the  disturbance  in  the  value  of  gold,  or,  what  comes  to  the  same 
thing,  in  the  gold  prices  of  commodities,  which  followed  the  dis- 
coveries, there  was  a  point  about  which  the  fluctuations  moved, 
and  beyond  which  the  advance  or  decline  did  not  permanently 
pass.  Prices  were  in  the  first  instance  forced  upwards  through  an 
increased  demand  for  commodities ;  the  increase  of  demand  led  to 
an  increase  of  supply,  and  this  to  a  reaction  in  prices  towards  their 
former  level.  In  the  case  of  imported  commodities  this  reaction  was 
carried  to  the  full  extent  of  the  previous  rise,  but  in  domestic 
products  the  decline  was  arrested  at  a  higher  point,  the  further 
fall  being  prevented  by  the  check  given  to  production  through  the 
high  rate  of  money  wages.  The  natural  level  of  Australian  prices, 
and  therefore  the  value  of  gold  in  Australia,  was  thus  determined 
by  the  rate  of  wages  measured  in  gold,  and  this,  as  we  have  seen, 
was  regulated  by  average  earnings  on  the  gold-fields.  The  rate  of 
gold  earnings,  or,  as  this  is  in  technical  language  expressed,  "the 
cost  of  gold,"  is  therefore  the  circumstance  which,  in  the  final 
resort,  regulates  the  value  of  the  metal,  and  sets  the  limit  beyond 
which  depreciation  cannot  permanently  pass.  Now  we  have  seen 
that  in  Australia  gold  wages  have,  in  consequence  of  the  gold  dis- 
coveries, risen  in  rather  more  than  a  twofold  proportion ;  and  since, 
whether  gold  is  raised  from  mines  or  imported  in  exchange  for 
commodities,  gold  wages,  or  the  return  to  labour  in  gold,  will 
always  represent  the  cost  of  the  metal,^  it  follows  that  the  cost  of 
gold  has  been  reduced  in  Australia  by  the  gold  discoveries  to  the 
extent  of  about  fifty  per  cent.  Fifty  per  cent.,  therefore, — equiva- 
lent to  a  twofold  advance  in  prices, — gives  the  maximum  beyond 
which  (on  the  supposition  that  no  more  productive  mines  are  dis- 
covered) the  general  value  of  gold  cannot  permanently  fall.  Further, 
it  has  appeared  that,  although  a  reduction  in  the  cost  of  gold  tends 
to  cause  a  corresponding  fall  in  its  value,  the  actual  realization  of 
this  result  depends  upon  the  possibility  of  so  enlarging  the  circu- 
lation as  to  render  this  fall  possible.  Thus  we  have  seen  that  the 
price  of   gold   in   Australia   fell,   pending   the   enlargement   of    the 

iSee  on  this  point  Senior's  Essay  "On  the  Cost  of  Obtaining  Money." 


THE  AUSTRALIAN  EPISODE  97 

currency,  by  the  importation  of  sovereigns  from  England,  which  is, 
in  other  words,  to  say  that  the  value  of  the  currency  was,  during 
this  period,  maintained  above  its  natural  cost  level.  This  sever- 
ance of  value  from  cost  was  indeed  in  Australia  of  brief  continu- 
ance, because,  the  local  circulation  being  small,  it  required  but  a 
short  time  to  double,  quadruple,  or  otherwise  augment  it  as  the 
occasion  might  render  necessary.  But  throughout  the  world  at 
large,  the  process  of  augmentation,  owing  to  the  vast  dimensions 
of  its  currencies,  is  one  necessarily  of  slow  accomplishment,  and, 
pending  its  fulfilment,  the  value  of  gold  is  of  necessity  maintained 
above  the  level  prescribed  by  its  cost.  It  is  this  which  at  present 
sustains  the  value  of  gold  in  the  general  markets  of  commerce, 
notwithstanding  the  cheapening  of  its  production  effected  by  the 
gold  discoveries.  Whether  that  value  will  ever  be  lowered  in  the 
same  proportion,  whether  gold  will  ever  fall  throughout  the  world 
at  large  as  it  has  fallen  in  Australia  and  California,  depends  upon 
whether  the  conditions  which  have  lowered  its  value  in  them  can 
be  generally  satisfied — that  is  to  say,  depends  upon  whether  the 
increased  supply  which  such  a  jail  would  render  necessary  can  be. 
obtained  at  the  present  cost.  Into  the  further  discussion  of  this 
question  I  do  not  now  enter,^  the  object  of  this  paper  being  to 
point  out  the  principal  issues  which  the  general  problem  involves, 
not  to  attempt  their  solution.  But  from  the  facts  which  have  been 
stated,  we  are  justified  in  concluding  that,  so  long  as  the  present 
want  of  conformity  between  the  cost  and  the  value  of  gold  continues, 
so  long  a  constant  premium  will  exist  on  its  production,  and  so 
long  our  supply  of  gold  will  continue  to  increase. 

But,  secondly,  let  us  consider  what  light  our  conclusions  respect- 
ing the  gold  countries  throw  upon  a  question  which  has  been  much 
discussed, — I  mean  the  effect  of  this  movement  on  the  real  wealth, 
the  substantial  well-being,  of  the  world.  That  the  gold  discoveries 
have  added  to  the  real  wealth  of  the  inhabitants  of  Australia  and 
California  is  indeed  exceedingly  apparent ;  but  what  has  been  their 
effect  upon  the  interests  of  other  nations?  Has  the  cheapness  of 
Australian  or  Californian  gold  added  equally  to  the  effectiveness  of 
their  industry,  and  extended  their  command  over  the  comforts  and 

^The  reader  will  find  some  remarks  on  this  aspect  of  the  question  in  the 
Fourth  Essay,  p.  109  et  seq. 


q8  CAIRNES 

enjoyments  of  life?  The  answer  of  some  writers  to  this  question 
has  been  very  strongly  in  the  affirmative ;  but,  with  the  light  derived 
from  the  previous  discussion,  we  may  perhaps  see  grounds  for  arriving 
at  a  different  conclusion.  We  have  seen  that  the  gain  of  Australia 
and  California  from  their  gold-fields  is  confined  to  that  portion  of 
their  trade  which  they  carry  on  with  foreign  countries ;  that  it  is 
only  in  so  far  as  they  part  with  their  gold  that  they  derive  from  it 
any  benefit.  Now  the  world,  as  a  whole,  has  no  foreign  trade ;  it 
has  no  means  of  exchanging  for  the  productions  of  other  planets 
the  gold  which  it  produces ;  from  which  it  seems  to  follow  that, 
regarded  as  a  single  community,  the  world  is  incapable  of  realizing 
those  conditions  on  which  the  benefit  to  be  derived  from  cheap 
money  depends.  The  conclusion  to  which  this  consideration  points 
is,  that  the  operation  of  the  new  good  will  be  confined  to  causing  a 
new  distribution  of  real  wealth  in  the  world  without  affecting  its 
aggregate  amount ;  and  that,  consequently,  the  gain  of  the  gold 
countries  must  be  reaped  at  the  expense  of  other  nations. 

This  conclusion  is  no  doubt  much  at  variance  with  prevailing 
notions,  and  with  the  deep-seated  prejudices  of  the  ''mercantile 
system ;  "  and  will  not,  therefore,  be  easily  admitted.  Nevertheless, 
if  we  reflect  on  the  character  of  the  commerce  which  has  arisen  out 
of  these  discoveries,  we  may  see  reason  for  accepting  its  truth.  The 
trade  between  the  gold  countries  and  the  rest  of  the  world  is  one  in 
which  consumable  commodities  on  one  side  are  exchanged  against 
money,  or  the  materials  of  money,  on  the  other.  A  large  portion 
of  the  industry  of  the  world  is,  through  the  medium  of  this  trade, 
employed  in  ministering  to  the  real  wants — the  appetites,  tastes, 
and  other  human  needs — of  Australia  and  California.  Let  us  in- 
quire what  is  the  want  to  which  these  countries  minister  in  return. 
It  will  be  said  to  the  want  of  more  gold — the  want  of  an  enlarged 
circulating  medium.  True ;  but  what  is  the  foundation  of  this 
want  ?  and  in  what  way  does  its  satisfaction  promote  human  hap- 
piness ?  Human  industry  is  not  rendered  more  efficient,  nor  human 
happiness  more  full,  by  the  use  of  two  coins  instead  of  one.  Why, 
therefore,  may  not  the  business  of  production  and  exchange  be 
carried  on  upon  the  former  terms?  I  apprehend  that  the  correct 
answer  to  this  question  is  that  gold  —  the  great  medium  of  exchange 
and  universal  equivalent — having  been  cheapened  in  Australia  and 


THE  AUSTRALIAN  EPISODE  99 

California,  these  countries  of  necessity  possess  an  exceptional  ad- 
vantage in  their  commercial  dealings  with  the  rest  of  the  world, 
until  the  gold  prices  of  commodities  in  other  countries  are  propor- 
tionally raised,  and  that  to  effect  this  object ^ — to  raise  the  prices 
of  their  productions  in  proportion  to  the  diminished  cost  of  gold^ — 
the  quantity  of  their  gold  circulation  must  be  increased.  The  na- 
tions of  the  world  have  thus  by  the  gold  discoveries  been  placed 
under  the  necessity  of  enlarging  their  currencies ;  and  this  can  only 
be  accomplished  by  parting  with  their  productions  in  exchange  for 
the  required  supply.  Hence  the  character  of  the  traffic  which  we 
are  now  witnessing, —  a  traffic  in  which  consumable  goods  are  ex- 
changed for  money,  and  real  for  nominal  wealth.  It  is  therefore  no 
natural  want  to  which  this  one-sided  trade  is  subservient,  no  desire, 
the  satisfaction  of  which  adds  an  iota  to  human  enjoyment:  it  is 
merely  an  artificial  requirement,  a  disagreeable  and  unprofitable 
necessity,  originating  in  the  gold  discoveries,  and  satisfied  at  the 
expense  of  commercial  nations. 

I  am  aware  indeed  that  there  are  writers  who  regard  gold  not 
simply  as  a  convenient  medium  for  the  exchange  of  commodities 
independently  produced,  but  as  in  itself,  a  source  of  productive 
energy,  as  "the  motive  power  of  all  industry  and  commerce,"^  and 
who  accordingly  consider  "an  addition  to  the  quantity  of  money  to 
be  the  same  thing  as  an  addition  to  the  fixed  capital  of  a  country"- 
— as  equivalent  in  its  effects  upon  industry  to  "improved  harbours, 
roads,  and  manufactories."^  According  to  such  views  the  influence 
of  the  gold  discoveries  must  be  universally  beneficial, —  beneficial, 
not  merely  in  relation  to  the  countries  which  produce  the  cheap 
money,  but  in  a  still  more  eminent  degree  in  relation  to  those  which 
permanently  retain  it.  But  in  spite  of  the  plausibilities  of  the  mer- 
cantile theory,  common  sense,  no  less  than  economic  science,  will 
continue  to  ask  how  the  world  is  enriched  by  parting  with  its  real 
wealth? — how  the  well-being  of  Europe  and  Asia  is  promoted  by 
parting  with  the  materials  of  well-being,  receiving  in  return  not 
materials  of  well-being,  not  augmented  supplies  of  wool  and  tallow, 
corn  and  provisions,   not  those  commodities  which   new  countries 

iSeyd,  California  and  its  Resources,  p.  5. 
2Tooke,  History  of  Prices,  Vol.  VI,  p.  46. 
3  Ibid. 


100  CAIRNES 

are  specially  fitted  to  produce,  and  of  which  old  countries  are  press- 
ingly  in  need,  but  what? — increased  supplies  of  the  precious  metals, 
a  more  cumbrous  medium  of  exchange ! 

So  singular  and  abnormal  indeed  has  been  the  course  of  industrial 
affairs  hitherto  in  the  gold  countries, — so  strange  has  been  the  spec- 
tacle of  a  country  abounding  in  resources  which  she  dares  not 
touch,  and  drawing  from  other  countries  commodities  which  she  is 
specially  fitted  to  produce, —  that  it  has  not  failed  to  attract  the 
attention  of  thoughtful  observers,  and  to  suggest  the  pertinent  inquiry, 
how  long  is  this  state  of  things  to  continue  ?  Is  the  development  of 
the  great  and  varied  resources  of  Australia  and  California  to  be 
perpetually  subordinated,  if  not  indefinitely  postponed,  to  the  single 
pursuit  of  gold-mining  ?  Are  the  other  nations  of  the  world  destined  to 
continue  for  ever  labouring  in  the  service  of  the  gold  countries,  for 
no.  other  than  the  barren  reward  of  an  addition  to  their  circulation  ? 
These  questions  have  been  frequently  put,  but  I  am  not  aware 
that  they  have  as  yet  been  satisfactorily  answered.  The  writers  who 
have  started  them  have  indeed,  correctly  enough,  connected  the  pres- 
ent condition  of  Australian  industry  with  the  high  price  of  labour  in 
that  country,  but  they  do  not  seem  to  perceive  very  clearly  upon 
what  the  maintenance  of  this  high  price  of  labour  depends.  It  is 
commonly  spoken  of  as  resulting  from  the  scarcity  of  workmen, 
and  the  inference  appears  to  be  made  that  it  will  gradually  disap- 
pear as  population  increases ;  but  this  mode  of  reasoning  arises 
from  confounding  the  temporary  with  the  permanent  causes  which 
regulate  wages.  India  is  a  less  densely  peopled  country  than  Great 
Britain,  but  the  rate  of  wages  in  India  is  many  times  less  than  the 
rate  of  wages  in  Great  Britain.  The  fact  is,  the  average  rate  of 
money  wages  in  a  country  is  regulated,  not  by  the  movements  of 
population,  but  by  the  causes  which  determine  for  it  the  cost  of  its 
money.^  In  the  gold  countries,  as  we  have  seen,  these  causes  are 
the  productiveness  of  industry  in  raising  gold :  and,  therefore,  so 
long  as  the  present  productiveness  of  the  gold-fields  is  maintained, 
the  rate  of  money  wages  in  Australia  and  California  cannot  fall 
permanently  below  its  present  level.  How  long  this  rate  of  produc- 
tiveness is  likely  to  last,  is  a  question  the  discussion  of  which  would 
carry  me  entirely  beyond  the  necessary  limits  of  this  paper ;  but  on 

iSee  Senior's  Essay  "On  the  Cost  of  Obtaining  Money." 


THE  AUSTRALIAN  EPISODE  lOi 

the  supposition  of  its  being  maintained,  we  can  have  no  difficulty 
in  discovering  the  condition  on  which  the  industrial  development  of 
the  gold  countries  depends. 

That  condition  is  briefly  this — the  prices  throughout  the  world 
should  rise  in  proportion  as  the  cost  of  gold  in  the  gold  countries 
has  fallen.  So  long  as  the  present  pecuniary  rates  of  the  gold  coun- 
tries are  exceptional,  so  long  Australian  and  Californian  producers 
of  other  commodities  than  gold  will  labour  under  a  disadvantage 
in  their  competition  with  gold  miners ;  and  so  long  the  non- 
monetary exports  of  those  countries  will  be  limited  to  that  small 
class  of  commodities,  in  which  their  advantage  over  other  countries 
is  as  great  as  it  is  in  their  command  of  gold.  But  with  the  advance 
of  gold-prices  in  foreign  markets,  this  class  of  commodities  will  be 
extended.  With  the  fall  in  the  value  of  money,  it  will  become  less 
profitable  to  raise  and  export  money ;  with  the  rise  in  the  price  of 
other  things,  it  will  become  more  profitable  to  raise  and  export 
them ;  and  a  larger  share  of  the  whole  labour  and  capital  of  the 
country  will  consequently  be  turned  to  the  latter  purposes.  We 
may  illustrate  the  principle  by  an  actual  case.  For  several  years 
subsequent  to  the  gold  discoveries  timber  was  largely  imported  into 
Australia  from  the  Baltic ;  and  I  perceive  that  it  is  still  upon  the 
list  of  her  imports.  But  during  all  this  time  there  have  been  within 
a  few  miles  of  the  localities  where  this  Baltic  timber  has  been 
used,  extensive  forests  of  gum-trees,  inviting  the  axe  of  the  pioneer, 
capable  of  affording  timber  perfectly  suited  to  the  purposes  for  which 
timber  in  the  mining  districts  is  principally  required.  Indeed  this  gum- 
tree  timber  has  been  freely  employed  where  it  could  be  obtained  close 
to  the  spot  where  it  was  wanted,  but  rather  than  go  fifty  miles  to  cut 
it,  the  Australian  workman  prefers  to  import  it  from  the  other  side 
of  the  globe.  The  explanation  of  this  conduct  is  the  low  compara- 
tive cost  of  Australian  gold.  A  day's  labour  employed  in  crushing 
quartz  or  in  digging  auriferous  clay,  enables  the  Australian  to  obtain 
more  timber  than  the  same  labour  employed  in  felling  trees.  Every 
rise  in  prices,  however,  in  foreign  markets,  will  diminish  the  cost 
of  gold  to  the  foreigner,  and  thus  lessen  the  comparative  advantage 
of  gold-digging:  the  domestic  production  will  gradually  gain  upon 
the  foreign  trade,  and  the  area  over  which  timber-cutting  is  profit- 
able will  be  extended.    This  process  has  already  taken  place  to  some 


102  CAIRNES 

extent,  partly  through  the  rise  in  the  cost  of  gold,  with  the  exhaus- 
tion of  some  of  the  richer  deposits,  partly  through  the  advance  in 
the  price  of  timber  in  foreign  markets ;  and  it  will  doubtless  con- 
tinue. It  is  obvious  that  the  same  principle  will  operate  equally 
in  the  case  of  every  commodity  which  the  gold  countries  are 
capable  of  producing.  With  every  rise  in  gold  prices  throughout 
the  world,  gold  will  become  a  less  profitable  remittance ;  other 
commodities  will  become  more  profitable ;  and  this  will  continue, 
until  either  prices  throughout  the  world  rise  in  proportion  to  the 
reduction  in  the  cost  of  gold — that  is  to  say,  to  double  their 
present  amount — or  until  through  the  exhaustion  of  the  present 
gold-fields,  gold  can  no  longer  be  produced  at  its  present  cost. 

It  will  not  be  till  one  or  other  of  these  contingencies  happens, 
that  the  industrial  development  of  the  gold  countries  can  be  fully 
accomplished,  or  that  the  world  can  derive  from  their  commerce 
that  contribution  to  its  real  well-being  and  happiness,  which  their 
great  and  varied  resources  render  them  so  competent  to  yield. 

POSTSCRIPT^ 

The  history  of  the  Australian  trade  since  this  essay  was  written 
furnishes  so  striking  an  illustration  of  the  views  put  forward  in 
this  paragraph,  that  perhaps  I  may  be  pardoned  for  referring  to  it. 
During  the  whole  of  this  time,  the  double  process  referred  to — 
the  gradual  exhaustion  of  the  richer  gold-lields,  and  the  simultaneous 
rise  in  prices  throughout  the  world  external  to  the  gold  countries — 
has  been  in  operation ;  and  every  step  in  the  movement  has  wit- 
nessed some  new  development  of  Australian  industry.  Thus,  while 
between  1856-  and  1870  the  production  of  gold  in  Victoria  had 
fallen  from  11,943,000/.  to  6,119,000/.,  or  to  a  little  more  than 
one-half  of  its  former  amount,  the  non-monetary  exports  of  the  colony 
had  increased  from  3,546,000/.  in  1856  to  6,351,000/.  in  1870;  the 
increase  taking  place  chiefly  in  wool,  tallow,  and  preserved  meats. 
But  the  effect  of  the  double  process  of  failing  gold  mines  and  rising 
prices  in  foreign  countries  has  been   felt,  up  to  the  present,   far 

^  Cairnes,  Essays  in  Political  Economy   (1873),  pp.  50-52. 

21  commence  with  1856,  this  being  the  first  year  of  the  publication  of  "The 
Statistical  Abstract  for  the  Colonies,"  from  the  last  number  of  which  (1872)  the 
figures  in  the  text  are  taken. 


THE  AUSTRALIAN  EPISODE  103 

less  in  increasing  the  number  and  the  amount  of  exports  than  in 
curtaiHng  those  of  imports,  and  in  developing  domestic  production. 
The  foreign  trade  of  Victoria  presents  the  singular  and  almost 
unique  spectacle  of  a  steady  decline  in  its  rapid  growth  of  popula- 
tion and  general  wealth.  I  have  no  returns  of  the  population  of 
that  colony  for  1856  (the  date  at  which  the  commercial  statistics 
begin),  but  it  was  probably  between  300,000  and  400,000;  in  1861, 
it  was  541,000,  in  1870,  729,000;  in  other  words  the  population 
must  have  nearly  doubled  itself  in  these  sixteen  years ;  the  general 
prosperity  of  the  country  during  the  same  time  being  almost  unex- 
ampled. But  the  noteworthy  circumstance  is,  that  while  the  coun- 
try was  thus  prospering,  its  external  trade  was  undergoing  constant 
contraction,  falling  from  a  total  of  15,489,000/.  in  1856,  to  12,470,- 
000/.  in  1870.  The  fact,  I  may  mention  in  passing,  shows  how 
little  the  foreign  trade  of  a  country,  as  measured  by  its  exports  and 
imports,  furnishes  a  correct  criterion  of  its  industrial  progress  or 
growth  in  real  wealth.  The  explanation  of  the  phenomenon  is  that 
which  I  have  given  in  the  foregoing  essay :  with  every  decline  in  the 
productiveness  of  the  mines,  and  with  every  advance  in  foreign 
prices,  the  gain  on  importation  decreased  and  home  production 
became  relatively  more  profitable.  The  result  has  been  that,  from 
being  a  large  importer  of  breadstuffs,  butter,  beer,  boots  and  shoes, 
provisions,  spirits,  &c.,  Victoria  has  either  discontinued  altogether 
or  greatly  curtailed  her  importation  of  all  these  commodities,  which 
she  now  produces  from  her  own  internal  resources.  Is  this  course 
of  development  for  the  advantage  of  Victoria?  Plainly,  I  think,  if 
we  have  regard  to  her  general  interests,  social  and  political  as  well 
as  pecuniary,  we  must  answer  in  the  affirmative ;  though,  as 
economists,  we  must  also  recognize  that,  looking  at  the  question 
from  a  purely  material  standpoint,  this  affirmation  cannot  be  made 
good ;  since  it  is  certainly  a  fact  that  the  diminishing  returns  of 
her  gold-mines  have  deprived  her  of  that  command  of  foreign 
markets  which  she  formerly  possessed ;  while  the  resort  to  her  own 
fields  of  production  in  lieu  of  foreign  markets,  being  as  it  is  a 
dernier  ressort,  cannot  but  indicate  a  diminishing  productiveness 
of  her  general  industry.  But  whatever  may  be  the  interests  of 
Victoria  herself  in  this  matter,  as  regards  the  interests  of  other 
countries  the  case  is  clear.    Had  her  gold-mines  continued  as  rich 


104  CAIRNES 

and  productive  as  they  were  during  the  first  few  years  following 
the  discoveries,  and  had  gold  prices  through  the  world  remained  at 
the  then  level,  Victoria  would  have  continued  to  export  gold  in  quan- 
tities ever  increasing  as  her  population  and  capital  increased,  for 
which  the  world  would  have  had  to  pay  in  the  commodities  of  real 
wealth.  In  return  for  the  products  of  their  labour  in  the  form 
of  the  conveniences  and  comforts  of  life,  foreign  countries  would 
have  gained  an  addition  to  their  circulation.  Instead  of  this,  their 
industry  is  now  being  gradually  relieved  from  this  task  of  adding 
to  their  currencies,  while  the  returns  of  their  trade,  no  longer  con- 
sisting of  barren  metal,  take  the  form  of  increasing  supplies  of 
wool,  tallow,  and  meat. 


% 


IV 

TAUSSIG:  WAGES  AND  PRICES  IN  RELATION  TO 
INTERNATIONAL  TRADE^ 

THE  main  thesis  of  the  present  paper  is  that  in  considering  the 
working  of  international  trade,  attention  should  be  paid  more 
to  the  range  of  money  incomes,  and  less  to  the  range  of  prices  than 
is  usually  the  case  when  economists  take  up  this  set  of  topics ;  and 
that  in  gauging  the  advantages  which  a  country  secures  from 
international  trade,  we  should  look  primarily  to  the  range  and  the 
variations  of  money  incomes. 

It  is  usually  set  forth  that  the  country  where  prices  are  highest 
gains  most  from  international  trade,  and  the  country  where  prices 
are  lowest  gains  least.  The  range  of  prices  obviously  enough  is  not 
in  itself  of  consequence.  High  prices  simply  mean  the  use  of  more 
counters  in  exchange.  But  in  buying  imported  commodities  those 
whose  domestic  transactions  are  carried  on  with  many  counters  have 
an  advantage.  Foreign  goods  are  not  so  high  in  price,  and  are 
procured  more  easily.  Conversely,  countries  with  low  prices  are  ill 
off  as  regards  imported  goods,  which  are  bought  on  hard  terms  by 
people  whose  scale  of  money  prices  is  low. 

This  statement  of  the  case  would  be  open  to  no  exception  if  the 
words  "money  incomes"  were  used  throughout  when  stating  the 
situation  of  the  people  of  a  given  country.  It  is  high  money  incomes 
that  are  of  consequence  in  international  trade,  not  high  prices.  In 
fact,  a  country  may  have,  not  high  prices,  but  low  prices,  and  still 
be  in  an  advantageous  position  as  regards  international  trade.  High 
money  incomes  do  not  necessarily  or  commonly  mean  high  prices. 
It  is  by  a  consideration  of  the  relation  between  money  incomes  and 
prices,  of  the  possibilities  of  divergence  or  parallelism  between 
them,  that  some  contribution  may  perhaps  be  made  toward  better 
understanding  the  phenomena. 

ip.  W.  Taussig  (1859-  ))  in  Quarterly  Journal  of  Economics,  August, 
1906. 

105 


io6  TAUSSIG 

Let  us  consider,  for  this  purpose,  a  country  in  which  wages  and 
other  money  incomes  are  high.  The  United  States,  for  example, 
has  a  high  range  of  money  incomes.  It  is  commonly  thought  to 
have  also  high  prices.  Let  us  compare  its  situation  with  that  of 
the  European  countries  with  which  it  trades,  and  ascertain  wherein 
it  gains,  and  how  far  its  gains  are  connected  with  the  prices  of 
goods  and  the  money  rates  of  wages  and  other  incomes.  For  the 
sake  of  simplicity,  in  speaking  of  the  United  States  or  similar  coun- 
tries, I  shall  use  indifferently  the  terms  ''money  wages"  and  ''money 
incomes,"  leaving  it  to  be  understood  that  not  wages  only,  but 
other  money  incomes  as  well — rents,  profits,  interest,  the  earnings 
of  independent  farmers  or  artisans — tend  to  be  correspondingly 
high. 

Begin  by  recalling  some  of  the  familiar  principles  of  international 
trade.  Under  a  state  of  freedom,  goods  that  are  imported  and 
exported  will  sell  at  approximately  the  same  prices  the  world  over. 
There  will  of  course  be  differences  from  cost  of  transportation. 
Imported  goods  will  sell  at  prices  higher  than  their  prices  in  the 
exporting  countries  by  the  amount  of  cost  of  carriage.  Sometimes 
a  commodity  that  newly  enters  into  foreign  trade — one  that  a 
shrewd  merchant  discovers  to  be  cheap  in  one  country  and  salable 
in  another — will  sell  in  the  importing  country  at  a  large  advance ; 
and  doubtless  the  action  of  competition  in  leveling  profits  and 
reducing  such  differences  of  prices  to  the  "normal"  point  is  not  so 
quick  and  thorough  as  the  economists  are  disposed  to  believe.  But 
on  the  whole  we  may  reason  on  the  assumption  that  under  condi- 
tions of  freedom  those  commodities  which  enter  into  international 
trade  have  a  common  price  the  world  over.  The  extraordinary 
cheapening  of  transportation  during  the  last  half-century,  the  easy 
transmission  of  news,  the  perfected  organization  of  markets  and 
exchanges,  contribute  to  make  this  assumption  a  safe  one  for  all 
the  great  staples.  Customs  duties,  of  course,  are  an  important 
cause  of  differences  in  price ;  of  these  something  more  will  be  said 
presently.  But  the  fundamental  principles  can  be  best  elucidated 
by  tracing  their  operation  under  free  trade. 

Every  country  will  export  those  things  which  are  cheap  in  its 
borders — whose  prices  are  so  low  that  they  can  be  shipped  to 
foreign  countries  and  still  sold  at  the  advance  needed  to  cover  cost 


WAGES  AND  PRICES  107 

of  carriage.  And  those  things  will  usually  be  cheap  which  are  pro- 
duced with  a  comparatively  small  amount  of  labor  —  those  in  which 
the  effectiveness  of  labor  is  great.  A  country  with  high  money 
wages,  like  the  United  States,  can  yet  put  goods  on  the  market 
(whether  the  domestic  market  or  the  foreign)  at  low  prices,  if  its 
labor  is  productive.  Such  is  the  familiar  situation  with  our  great 
agricultural  staples.  The  money  incomes  of  those  who  grow  wheat 
in  the  United  States,  whether  the  earnings  of  the  independent 
farmers  or  the  wages  of  the  laborers  whom  they  hire,  are  larger 
than  the  incomes  and  wages  of  wheat-growers  in  other  countries. 
But  the  wheat  can  none  the  less  be  sold  at  a  low  price  in  the 
United  States,  and  can  be  exported  from  the  United  States,  because 
our  labor  is  effective  in  producing  it.  Why  the  labor  is  effective  is 
no  part  of  the  present  inquiry.  One  cause  clearly  is  the  abundance 
of  fertile  land ;  a  cause  no  less  important  is  the  wide-spread  intelli- 
gent use  of  good  agricultural  machines.  These  very  agricultural 
machines — to  mention  another  commodity — are  largely  exported 
from  the  United  States,  though  the  wages  of  the  workmen  who 
fashion  them  are  high ;  because  the  methods  of  making  them  have 
been  greatly  perfected.  To  specify  still  another  case,  the  earnings 
of  the  negroes  who  grow  cotton  in  our  Southern  States,  low  as  they 
may  be  when  measured  by  ordinary  American  standards,  are  higher 
than  those  of  the  fellaheen  in  Egypt  or  the  ryot  in  India.  Yet  Amer- 
ican cotton  can  be  sold  as  cheaply  as  that  of  Egypt  or  India.  The 
soil  and  climate  make  the  Southern  negro's  labor  effective,  and 
doubtless  in  some  degree  a  better  organization  and  direction  of  his 
labor  contribute  also  to  make  it  so. 

All  this  is  but  a  restatement  of  the  principle  that  a  country  will 
export  those  things  in  which  it  has  a  comparative  advantage.  The 
exposition  of  that  principle,  as  it  is  usually  found  in  the  books  on 
economics,  would  be  simpler  and  more  telling  if  it  were  made  clear 
(the  common  form  of  statement  fails  to  make  it  so)  that  the  things 
in  which  a  country  has  a  "comparative  advantage"  are  those  which 
are  likely  to  be  low  in  price.  International  trade,  like  all  trade, 
though  fundamentally  a  matter  of  barter,  is  proximately  a  matter 
of  price.  A  country  sells  abroad  those  things  which  it  can  produce 
at  low  prices  at  home.  Ordinarily,  those  things  are  produced  at 
low  prices  at  home  in  which  the  country's  labor  is  effective. 


io8  TAUSSIG 

Proceed  now  to  the  next  stage :  what  will  be  the  range  of  prices 
for  those  commodities  which  do  not  enter  into  the  sphere  of  inter- 
national trade — those  which  are  not  exported  or  imported,  but  are 
bought  and  sold  solely  within  the  country?  The  quantity  of  such 
commodities  is  very  great,  and  in  all  countries  probably  much  ex- 
ceeds that  of  commodities  having  a  world  range  of  prices.  Many 
things  are  too  bulky  to  be  transported  over  any  considerable  dis- 
tance— as  stone,  bricks,  timber.  Many  are  perishable,  as  milk,  but- 
ter, eggs,  fruits,  vegetables.  No  doubt  modern  improvements  in 
the  transportation  of  bulky  goods  and  in  the  preservation  of  those 
that  are  perishable  tend  to  enlarge  the  sphere  of  foreign  trade.  But 
such  things  are  still  sold  mainly  in  their  own  region  and  at  the 
prices  of  their  own  region.  House-room  and  shelter,  a  most  impor- 
tant article  of  consumption  and  purchase,  cannot  be  transported  at 
all,  and  so  may  vary  widely  in  price  in  different  countries.  Some 
of  the  articles  used  in  building  houses — boards  and  laths,  doors  and 
windows,  locks  and  hinges — may  indeed  be  sent  to  distant  regions. 
But  even  these  are  much  affected  by  the  customs  and  fashions  of  the 
several  countries,  and  are  usually  made  and  sold  on  the  spot  or  near 
it.  A  multitude  of  articles  which  might  conceivably  be  brought  from 
foreign  countries  are  in  fact  made  chiefly  at  home,  because  of  the 
persistent  sway  of  habit  and  tradition.  Such  are  clothing  and  boots, 
tools  and  machines,  wagons  and  harness.  The  reader's  imagination 
will  easily  enlarge  the  list.  The  prices  of  all  these  things  are  deter- 
mined under  domestic  conditions.  They  do  not  enter  into  inter- 
national trade,  and  have  no  world  level  of  prices. 

Most  persons  would  say  that  the  prices  of  such  commodities — 
it  will  be  convenient  to  speak  of  them  as  "domestic  commodities" 
—  will  be  high  in  countries  where  money  incomes  are  high  and  low 
in  those  where  money  incomes  are  low.  But  this  by  no  means  fol- 
lows. The  range  of  domestic  prices  in  a  country,  as  compared  with 
the  range  of  prices  of  the  same  things  in  other  countries,  depends 
on  the  effectiveness  of  labor  in  producing  the  domestic  commodities. 

Looking  at  the  United  States  as  our  example,  we  find  some  things 
higher  in  price  than  in  European  countries,  some  things  lower.  We 
know,  of  course,  that  the  exported  articles — wheat,  corn,  flour, 
meats,  cotton,  iron,  copper — are  as  cheap,  even  somewhat  cheaper. 
But  how  about  domestic  commodities?    Some  are  dearer,  some  are 


WAGES  AND  PRICES  109 

cheaper.  Comparison  is  often  difficult,  because  the  qualities  of 
things  vary;  but  every-day  observation  suffices  to  establish  signifi- 
cant differences.  Wheat  and  flour  are  cheaper,  yet  bread  from  the 
bake-shop  is  dearer.  Most  fruits  are  as  cheap  or  cheaper  in  the 
United  States,  especially  when  they  have  been  transported  some  dis- 
tance. In  the  immediate  region  of  fruit-growing,  fruits  are  often 
cheaper  in  Europe.  Eggs  are  dearer  in  the  United  States.  Milk  and 
butter  are  usually  dearer  also.  Bituminous  coal  is,  in  most  parts 
of  the  United  States,  as  cheap  or  cheaper.  Anthracite  coal  is  dear ; 
but  comparison  with  a  corresponding  article  in  European  countries 
is  not  easy.  The  simpler  kinds  of  cotton  clothing  are  cheaper. 
Boots  and  shoes  are  as  cheap,  probably  cheaper.  Woolen  clothing 
is  dearer.  Here  the  effect  of  the  duties  on  wool  must  be  reckoned 
with ;  but  ready-made  woolen  clothing  is  not  so  high  in  price  as  that 
made  to  order.  Household  furniture  is  cheaper;  hardware  and 
kitchen  utensils  are  probably  also  cheaper  when  due  allowance  is 
made  for  quality.  All  things  that  involve  personal  service — cab 
fares,  hotel  charges,  servants'  wages — are  markedly  higher  in 
price. 

An  interesting  case,  and  one  that  serves  to  bring  out  both  the 
difficulties  of  comparison  and  the  working  of  the  underlying  forces, 
is  that  of  house-room.  The  amount  that  is  actually  paid  out  for 
house  rent  is,  scale  for  scale  in  the  social  stratification,  higher  in  the 
United  States.  But  in  most  cases  more  is  got  for  the  money.  The 
space  is  ampler,  the  lighting  better,  the  appurtenances  more  con- 
venient. Persons  of  the  well-to-do  class  who  spend  a  season  in  Eu- 
rope will  commonly  pay  less  for  house  rent  than  they  would  expect 
to  pay  in  the  United  States,  but  they  are  commonly  content  with 
less  agreeable  and  convenient  accommodations.  A  significant  differ- 
ence is  observable  between  houses  made  chiefly  of  wood  and  those 
built  of  brick  and  stone.  Masonry  work  is  dearer  in  the  United 
States ;  wood  work  is  as  cheap  or  cheaper.  Houses  of  brick  or  stone 
cost  more  to  build  than  in  Europe ;  if  built  of  wood,  they  cost  less. 
The  explanation  is  that  machinery  can  be  applied  to  manipulating 
wood  more  easily  than  to  brick  or  stone.  Given  the  same  efficiency 
of  labor,  the  same  output  per  day  per  man,  and  it  is  evident  that  if 
you  pay  higher  wages  you  must  charge  higher  prices.  Such  in  the 
main  is  the  case  with  brick  and  masonry  work  in  the  United  States 


no  TAUSSIG 

as  compared  with  Europe.  Brickmaking  and  bricklaying,  stone- 
cutting  and  masonry,  are  done  chiefly  by  manual  and  artisan  labor, 
even  though  in  brickmaking  and  in  stone-cutting  there  is  probably  in 
the  United  States  somewhat  greater  use  of  power  and  machinery  than 
in  Europe.  Wages  being  higher,  and  the  output  of  labor  no  greater, 
prices  must  be  higher.  Wood  working,  on  the  other  hand,  from  the 
rough-sawn  timber  to  the  last  molding  on  the  door  or  windows,  is 
done  in  the  United  States  with  a  great  use  of  machinery ;  and,  what 
is  most  significant,  with  a  greater  use  of  machinery  and  labor- 
saving  devices  than  in  any  other  country.  Labor  is  thus  made  more 
effective,  and,  though  more  highly  paid,  its  product  is  not  neces- 
sarily sold  at  a  higher  price.  Given  a  sufficient  advantage,  and  the 
product  will  be  even  cheaper.  If  the  work  on  your  wooden  house 
is  all  done  on  the  spot  by  carpenters,  it  will  be  dearer  in  the  United 
States ;  but,  if  the  carpenters  simply  put  together  in  short  order 
the  machine-made  pieces  from  the  saw-mill  and  factory,  it  will  be 
cheaper  in  the  United  States.  The  last-named  is  the  way  in  which 
the  great  majority  of  houses  are  built  in  the  United  States  for  per- 
sons of  small  means  or  moderate  means ;  and  such  houses  are  as 
cheap  as  in  Europe  or  cheaper,  and  the  house  rent  for  them,  quality 
and  convenience  considered,  is  as  low  or  lower. 

This  explanation  of  the  range  of  house  rents  applies,  strictly 
speaking,  only  to  the  selling  price,  or  capital  value,  of  the  building 
and  improvements.  The  rental  is  compounded  of  a  return  on  this 
investment  and  of  premium  for  the  advantage  of  the  site,  namely, 
economic  rent  proper.  The  first  of  these  items,  interest  on  capital, 
is  affected  by  causes  very  different  from  those  that  govern  prices 
and  wages.  The  rate  of  interest  may  be  high  where  money  wages 
are  low,  and  low  where  wages  are  high.  In  fact,  however,  the 
variations  in  the  rate  of  interest  among  civilized  countries  are  not 
so  great  that  we  have  here  an  important  qualification  of  our  conclu- 
sions as  to  the  causes  acting  on  the  price  of  house-room.  Differences 
in  the  cost  of  building  will  affect  this  part  of  the  rental  much  more 
than  differences  in  the  rate  of  interest.  As  to  economic  rent,  the 
case  is  simpler :  this  return  may  be  expected  to  vary  pari  passu 
with  money  incomes.  To  apply  the  familiar  theorem,  rent  is  the 
result  of  price,  and  not  among  the  causes  of  price.  Where  the 
general  range  of  wages  and  of  incomes  is  high,  the  amount  that 


WAGES  AND  PRICES  iii 

will  be  paid  for  an  advantageous  or  indispensable  site  will  be  cor- 
respondingly high.  Hence,  looking  at  all  the  elements  of  the  case, 
we  are  prepared  to  learn  that  the  rents  of  tenements  in  New  York 
City  are  high.  The  investment  in  them  is  heavy.  Their  brick  work 
is  done  by  highly  paid  artisans,  with  little  use  of  labor-saving 
machinery.  A  crowded  population,  with  a  high  range  of  money 
incomes,  causes  economic  rent  to  rise  to  portentous  heights.  In 
smaller  cities  and  in  the  suburbs  of  most  larger  cities,  on  the  other 
hand,  modest  wooden  houses  for  artisans  are  cheap.  Economic  rent 
enters  little,  and  the  cost  of  building  is  comparatively  low. 

Similar  reasoning  can  be  applied  to  the  rental  of  business  struc- 
tures. The  modern  steel-frame  office  building  in  the  United  States 
probably  costs  less  per  unit  of  available  space  than  similar  buildings 
in  Europe.  The  brick  or  stone  business  structure  of  the  older  type 
probably  costs  more.  The  total  rental  is  a  compound  of  interest 
and  economic  rent,  the  latter  exercising  a  preponderant  influence  on 
those  sites  where  there  is  demand  for  the  enormous  amount  of  floor 
space  provided  in  the  huge  office  building. 

Ordinary  pick-and-shovel  work  costs  more  in  the  United  States : 
sewer-digging,  street-making,  the  grading  of  a  railway.  Wages  are 
higher,  and,  man  for  man,  no  more  is  accomplished  or  little  more. 
It  is,  indeed,  often  said  that  the  efficiency  of  common  labor  is 
greater  in  the  countries  of  higher  wages:  the  laborer,  getting  more 
food,  can  do  more  work.  There  is  doubtless  truth  in  the  assertion, 
when  comparison  is  made  between  the  wages  and  the  output  of 
laborers  in  starvation  countries,  like  British  India,  and  the  wages 
and  output  of  countries  where  life  is  less  cheap.  But  I  have  always 
been  doubtful  as  to  the  sweeping  applicability  of  this  sort  of  reason- 
ing. The  rice-fed  Chinaman  or  Japanese  seems  to  do  as  much  in  a 
day  as  the  beefy  Englishman ;  the  frugal  Italian  as  much  as  the 
extravagant  Irishman.  On  the  whole  we  may  expect  the  product 
of  ordinary  manual  labor  to  cost  more  (in  money)  in  a  country  like 
the  United  States.  No  doubt  much  work  that  seems  to  be  solely 
of  this  kind  is  affected  by  the  degree  and  extent  to  which  machinery 
and  labor-saving  devices  are  used.  The  familiar  apparatus  of  sewer- 
construction  in  the  United  States  is  vastly  superior  to  anything  of 
the  sort  in  common  use  on  the  continent  of  Europe.  The  same  is 
true  of  the  railway  contractor's  outfit.    So  far  as   the  American 


112  TAUSSIG 

engineer  and  contractor  can  secure  by  such  means  greater  results, 
the  high  money  wages  do  not  entail  high  expenses  and  high  prices. 

Railway  freight  rates  are  on  the  whole  lower  in  the  United  States. 
That  they  should  be  lower  or  as  low,  notwithstanding  the  higher 
wages  of  all  railway  employees,  is  clear  proof  that  the  efficiency  of 
railway  operation  in  the  United  States  is  greater  than  in  Europe. 
The  lower  rates  for  freight  and  the  greater  extension  of  facilities  for 
long  distance  traffic  go  far,  again,  to  explain  the  comparatively  low 
prices  of  many  commodities — fruits,  coal,  even  bread-stuffs  and 
meats.  One  great  cause  of  the  general  effectiveness  of  labor  in  the 
United  States  and  of  the  wide  diffusion  of  material  prosperity  has 
been  the  extraordinary  development  of  the  geographical  division  of 
labor ;  and  for  this  the  widely  ramifying  railway  net,  and  the  extent 
and  cheapness  of  railway  service,  have  been  indispensable.  Street 
railway  fares,  to  instance  another  curious  case,  are  as  low  or  lower 
in  the  United  States.  Even  at  the  lower  fares,  they  commonly  yield 
large  profits.    The  efficiency  of  labor  must  be  very  much  greater. 

Retail  prices — that  is,  the  spread  between  wholesale  and  retail 
prices — present  a  mixed  case.  If  the  operations  of  the  retail  dealers 
in  the  United  States  are  conducted  in  the  same  way  as  in  Europe, 
the  advance  of  retail  prices  over  wholesale  must  be  greater.  Other- 
wise the  earnings  of  the  retail  dealer  will  not  be  on  the  same  lib- 
eral scale  as  the  wages  and  earnings  of  the  rest  of  the  community. 
But  if  the  retail  dealer's  work  is  done,  not  in  the  same  way  as  in 
Europe,  but  in  a  more  effective  way,  he  can  reap  sufficiently  high 
gains  with  no  larger  margin  of  profit.  Both  situations  seem  to 
exist.  The  large  department  store  in  the  United  States  is  probably 
conducted  with  greater  efficiency  and  with  no  greater  advance  of 
retail  over  wholesale  prices  than  in  European  countries ;  though  the 
recent  rapid  growth  of  this  sort  of  shop-keeping  in  Europe  makes 
the  difference  less  than  it  would  have  been  ten  or  twenty  years  ago. 
On  the  other  hand,  a  great  deal  of  retailing — probably  the  greater 
part  of  the  sum  total  of  this  sort  of  work — is  still  done  on  a  small 
or  modest  scale.  The  grocer,  butcher,  apothecary,  must  usually  be 
near  his  customer.  This  means  that  the  operations  are  scattered  and 
are  conducted  on  no  large  scale.  In  such  case  the  advance  of  retail 
prices  over  wholesale — the  retailer's  "profit" — is  greater  in  the 
United    States.     Hence    it    may    happen    that    an    article    whose 


WAGES  AND  PRICES  113 

wholesale  price  is  lower  in  the  United  States  and  which  is  exported 
from  the  United  States  to  Europe,  may  yet  be  dearer  here  to  the 
retail  purchaser.  Expense  of  transporting  the  great  staples  across  the 
ocean  has  been  reduced  to  a  very  narrow  margin,  and  the  slight 
difference  caused  by  this  in  wholesale  prices  may  be  more  than 
balanced  by  the  greater  advance  of  retailer's  prices  in  the  country 
of  higher  money  incomes.  Butcher's  meat  may  cost  the  consumer 
more  in  the  United  States,  even  though  dressed  beef  be  sent  by  the 
shipload  across  the  Atlantic. 

Persons  of  the  well-to-do  classes  find  the  expenses  of  living  higher 
in  the  United  States  than  in  Europe ;  and  to  their  mind  there  is  no 
question  that  prices  here  are  higher,  and  higher  in  proportion 
to  the  higher  range  of  money  incomes.  The  explanation  is  partly 
that  much  of  their  expenditure  is  for  personal  services ;  partly 
that  another  large  fraction  of  it  is  for  those  articles,  imported 
and  other,  which  are  really  high  in  price ;  partly  that  a  higher 
scale  of  comfort  and  luxury  has  been  established  by  prevalent  pros- 
perity. The  items  that  are  most  conspicuously  dear  in  the  United 
States  and  cheap  in  Europe  are  the  various  kinds  of  service — 
domestics,  cabs,  hotels.  Where  the  range  of  wages  is  high,  these 
things  are  expensive.  Wages  for  domestic  service  are  particularly 
high  in  the  United  States,  because  the  spirit  of  democracy  makes 
the  occupation  distasteful.  Again,  the  expenditure  of  prosperous 
Americans  at  home  is  directed  in  large  degree  to  the  less  hackneyed 
and  less  common  articles — to  the  hand-made  things  rather  than  the 
machine-made  things.  The  hand-made  things  are  dear  in  a  country 
where  money  wages  are  high.  Clothing  made  to  order  is  dear, 
though  ready-made  clothing  is  by  no  means  dear  in  the  same  degree. 
Factory-made  furniture  is  cheap ;  custom-made  furniture  is  ex- 
tremely dear.  Cab  fares  are  high,;  street  railway  fares  are  low. 
Imported  articles  of  course  would  be  no  higher  in  price  than  abroad, 
or  very  little  higher,  were  they  admitted  duty  free.  Being  subjected 
to  heavy  duties,  they  also  are  expensive.  It  is  probable  that  the 
most  effective  part  of  our  protective  system  is  now  directed  against 
the  articles  made  in  larger  proportion  by  hand  with  the  tool,  and  in 
less  proportion  by  power  with  machinery.  These  are  the  things 
most  likely  to  be  imported  into  the  United  States,  and  most  enhanced 
in  price  by  the  protective  duties.    These  are  often,  though  by  no 


114  TAUSSIG 

means  always,  the  commodities  bought  by  the  well-to-do ;  and  thus 
there  is  ground  for  saying  that  the  social  effects  of  the  protective 
system  here  are  less  objectionable  than  in  countries  that  levy  duties 
on  the  staples  of  life. 

In  sum,  it  can  be  said  that  the  United  States,  though  a  country 
of  high  wages,  is  not  a  country  of  high  prices  for  the  great  mass  of 
the  community.  It  is  so  in  large  degree  for  the  rich  and  well-to-do. 
True,  the  artisans  and  workingmen  and  farmers  have  a  high  scale 
of  living,  for  they  have  plenty  to  spend ;  but  the  domestic  articles 
they  buy  are  on  the  whole  not  dear.  They  are  not  dear,  because 
the  effectiveness  of  labor  in  making  them  is  not  less  than  that  of 
labor  in  making  the  exported  articles.  Imported  articles  which  are 
duty  free,  like  tea  and  coffee,  are  as  cheap  (barring  cost  of  carriage) 
as  in  foreign  countries ;  and  here  also  the  American  gets  the  full 
benefit  of  his  higher  money  wages.  So  far  as  the  protected  articles 
are  concerned,  his  advantage  is  simply  thrown  away. 

What  has  been  said  of  the  United  States,  the  typical  country  of 
high  money  wages,  applies  mutatis  mutandis  to  countries  of  low 
wages.  In  a  country  of  low  money  wages  domestic  prices  may  or 
may  not  be  low.  Such  a  country  is  usually,  though  not  necessarily, 
one  with  an  all-around  inefficiency  of  labor.  Those  articles  as  to 
which  its  labor  is  least  inefficient,  and  which  are  transportable  or 
for  other  reasons  salable  abroad,  will  be  exported.  Though  they 
may  be  turned  out  by  ineffective  labor,  they  can  yet  be  sold  at  the 
international  price  because  the  money  expenses  of  production  are 
low.  Domestic  commodities — namely,  such  as  are  not  exported  or 
imported — will  be  comparatively  low  or  high  in  price,  according 
as  labor  in  producing  them  is  effective  or  ineffective.  The  wages  of 
servants  and  other  like  expenses  of  the  well-to-do  are  sure  to  be  low. 

Our  next  inquiry  is,  what  causes  high  money  wages  ?  The  answer 
in  brief  is  that  those  countries  have  high  money  wages  whose  labor 
is  effective  in  producing  exported  commodities,  and  whose  exported 
commodities  command  a  good  price  in  the  world's  markets.  The 
general  range  of  money  incomes  depends  fundamentally  on  the 
conditions  of  international  trade,  and  on  those  conditions  only. 
The  range  of  domestic  prices  then  follows :  it  is  high  so  far  as  the 


WAGES  AND  PRICES  115 

output  of  labor  in  domestic  commodities  is  small,  low  so  far  as  the 
output  of  labor  in  domestic  commodities  is  great. 

The  situation  is  simplest  in  the  case — difficult  to  find  in  the 
real  world,  but  instructive  for  illustration  of  the  principle — of  a 
country  having  a  monopoly  of  a  given  article  of  export  or  set  of 
exported  articles.  By  monopoly,  of  course,  is  here  meant  not  that 
the  producers  within  the  country  fail  to  compete  among  themselves, 
but  that  the  producers  of  no  other  country  compete  with  them.  The 
price  of  such  exported  articles  will  depend,  in  the  manner  with 
which  the  reader  may  be  supposed  familiar,  on  the  equation  of 
international  demand.  The  more  the  consumers  in  other  countries 
care  for  them,  the  higher  will  their  prices  be  pushed.  The  less  the 
labor  with  which  these  articles  are  produced  at  home,  the  higher 
will  be  the  money  wages  resulting  from  these  high  prices.  The 
higher  money  wages  in  the  exporting  industries  will  set  the  standard 
for  money  wages  in  the  country  at  large ;  but  the  general  high  wages 
may  or  may  not  be  accompanied,  as  already  explained,  by  high 
domestic  prices. 

Where  a  country  exports  in  competition  with  other  countries — • 
the  well-nigh  universal  case — the  same  forces  are  at  work.  The 
prices  at  which  the  exports  are  sold  depend  on  the  world  demand 
for  the  commodity.  In  that  world  demand,  or,  to  speak  more  care- 
fully, interplay  of  demand,  the  extent  to  which  the  consumers  in 
the  several  countries  care  for  the  articles  imported  into  them  deter- 
mines which  countries  shall  sell  their  exports  on  advantageous 
terms.  Those  countries  whose  exports  are  in  most  urgent  demand 
will  have  the  greatest  possibility  of  high  money  incomes.  Whether 
that  possibility  will  be  realized — whether  they  will  have  high  in- 
comes, in  fact — depends  on  the  labor  cost  of  their  exports.  The 
wheat  which  is  exported  by  the  United  States  and  by  Russia  sells 
at  the  same  price ;  but  that  price  means  large  money  returns  in  the 
country  of  machinery,  efficient  labor,  and  cheap  internal  transporta- 
tion, and  low  money  returns  in  the  country  which  lacks  these  advan- 
tages. In  the  language  of  Mill,^  "What  a  country's  imports  cost 
to  her  is  a  function  of  two  variables :  the  quantity  of  her  own  com- 
modities which  she  gives  for  them,  and  the  cost  of  those  commodities. 

^Mill,  Principles,  Bk.  Ill,  chap,  xviii,  §9. 


Ii6  TAUSSIG 

Of  these,  the  last  alone  depends  on  the  efficiency  of  her  labor :  the 
first  depends  on  the  law  of  international  values ;  that  is,  on  the 
intensity  and  extensibility  of  the  foreign  demand  for  her  commod- 
ities, compared  with  her  demand  for  foreign  commodities." 

Where  a  country  produces  and  exports  specie — gold,  let  us  say — 
the  case  may  seem  to  be  different ;  yet  a  little  consideration  will 
show  that  the  forces  at  work  are  the  same  as  in  countries  producing 
other  articles  of  export.  A  gold  mining  country  may  or  may  not 
have  a  high  level  of  domestic  prices.  Gold  is  indeed  a  commodity 
which  always  is  readily  taken  by  foreign  countries.  The  demand  for 
it  is  sometimes  said  to  be  limitless ;  more  carefully  stated,  it  is  con- 
stant. All  the  gold  produced  will  be  taken,  and  will  be  distributed 
over  the  world  among  virtually  all  the  trading  countries,  at  rates  of 
payment  which  will  be  very  slightly  modified  by  any  annual  or 
decennial  increase  in  the  quantity  sent  out  from  the  mining  coun- 
tries. If  now  the  gold  is  produced,  and  produced  freely,  with  little 
labor — if  it  is  cheap  in  that  essential  sense — the  mining  country 
will  have  high  money  incomes.  Such  was  the  case  in  California  and 
Australia  during  the  first  days  of  the  gold  discoveries.  Prices  of 
all  things  were  high  in  those  days ;  for  in  commodities  at  large 
labor  was  by  no  means  productive.  In  a  country  where  gold, 
though  mined,  is  not  produced  under  advantageous  conditions — 
where  the  mines  are  poor  or  mining  methods  at  a  low  stage — 
money  wages  will  not  be  high ;  and  the  gold  will  not  be  mined 
at  all  unless  it  yields  as  large  money  incomes  as  other  possible 
articles  of  export. 

•  In  the  case  of  a  gold  mining  country  we  may  note  a  qualification 
whuch  indeed  should  be  borne  in  mind  for  all  countries  and  for  all 
comrinodities :  it  is  to  be  assumed  that  the  exporting  industry  does 
not  pa.rtake  of  the  character  of  a  monopoly  within  the  country.  In 
the  placer  mining  days  of  California  and  Australia  any  laborer  with 
a  pan  and"  a  stock  of  provisions  could  join  in  the  hunt  for  gold,  and 
high  money  wages  were  a  matter  of  course.  When  more  elaborate 
mining  set  in,  high  wages  still  continued,  so  long  as  the  mining  capi- 
talists competed  among  each  other  for  laborers.  But  if  some  of 
the  mines  were  highly  productive  and  others  much  less  so,  the  pro- 
ductivity of  labor  at  the  margin  of  mining  would  fix  the  range  of 
money  wages.    There  might  be  advantageous  production  and  heavy 


WAGES  AND  PRICES  117 

exportation  of  specie,  without  a  high  range  of  wages,  if  the  exports 
came  predominantly  from  the  better  mines.  And  if  the  mines  were 
all  owned  and  operated  by  one  person  or  organization,  the  greatest 
richness  and  productiveness  need  not  result  in  high  wages.  All  the 
treasures  of  Potosi,  however  little  labor  they  cost  the  wretched  native, 
never  could  bring  him  high  returns,  even  in  money.  And  similarly, 
if  all  the  exporting  industries  of  the  United  States  were  under  such 
control  as  are  the  production  and  refining  of  petroleum,  then  the 
general  range  of  money  wages,  however  great  the  productiveness 
of  labor  and  however  strong  the  foreign  demand  for  the  articles, 
would  not  necessarily  be  high,  and  certainly  would  be  less  high  than 
under  conditions  of  unrestrained  competition.^ 

There  is  an  important  sense  in  which  it  is  true  that  a  country 
whose  position  in  international  trade  is  advantageous  has  not  only 
high  money  incomes,  but  high  prices  as  well.  In  the  preceding 
pages,  domestic  prices  have  been  said  to  be  high  or  low,  if  the 
prices  of  given  commodities  are  higher  or  lower  than  the  prices  of 
the  same  commodities  in  other  countries.  Thus  the  price  of  a  wagon 
may  be  spoken  of  as  high  or  low  in  the  United  States  if  it  is  higher 
or  lower  than  the  price  of  the  same  sort  of  wagon  in  Europe. 
Similarly,  railway  and  street  railway  fares  and  house  rents  may  be 

^The  foundation  for  all  such  discussion  as  this  was  laid  by  Ricardo,  whose 
genius  nowhere  shone  so  brilliantly  as  in  his  illumination  of  the  theory  of  foreign 
trade.  But  Ricardo,  so  far  as  I  know,  referred  only  to  general  prices  as  being 
subject  to  variation  between  different  countries.  Senior  seems  first  to  have  laid 
it  down  explicitly  that  the  range  of  money  incomes  depends  on  the  conditions  of 
foreign  trade  ("Lectures  on  the  Cost  of  Obtaining  Money"  (1830),  pp.  13-16). 
Mill  spoke  sometimes  of  high  prices,  sometimes  of  high  incomes,  as  the  result 
of  favorable  conditions  of  foreign  trade,  and  did  not  pause  in  his  exposition  to 
consider  the  relation  of  money  incomes  and  domestic  prices.  Cairnes  followed 
Senior,  though  using  different  language,  when  he  said  that  a  country  was 
interested  in  having  "  cheap  gold  "  ;  by  which  he  clearly  meant,  though  he  did 
not  say  it  in  so  many  words,  high  money  incomes — i.e.  much  gold  for  little 
labor.  Cairnes  also  noted  that  "cheap  gold"  did  not  necessarily  mean  high 
prices  of  domestic  commodities.  See  his  "Leading  Principles,"  Part  III,  chap,  v, 
§  I.  In  Bastable's  "Theory  of  International  Trade,"  4th  edition,  p.  71,  there 
is  a  brief  paragraph  indicating  that  this  able  thinker  had  reflected  on  the  com- 
plex relations  of  money  incomes  and  prices.  Professor  Edgeworth's  articles  on 
International  Trade  in  the  Economic  Journal,  Vol.  IV,  take  up  quite  different 
aspects  of  the  theory.  I  have  found  nothing  in  the  writings  of  French  or  Ger- 
man economists  to  show  that  such  topics  had  engaged  their  attention  at  all. 


ii8  TAUSSIG 

reckoned  low  if  they  cost  less  money  than  similar  things  in  Europe. 
But  we  may  compare  wagons  and  fares  and  rents,  not  with  European 
rates,  but  with  the  prices  of  the  same  things  at  a  different  time  and 
under  different  conditions  in  the  United  States.  So  considered,  it 
is  obvious  that  they  are  likely  to  vary  with  wages  and  money  in- 
comes. They  will  probably  rise  as  money  wages  rise,  and  fall  as 
money  wages  fall. 

If  we  suppose,  for  example,  that  the  conditions  of  international 
demand  change  to  the  advantage  of  a  given  country,  that  its  exports 
sell  on  better  terms,  and  that  money  incomes  in  the  exporting  indus- 
tries rise,  we  may  expect  that  the  same  rise  in  money  incomes  will 
spread  to  other  industries.  This  will  necessitate  in  those  other  in- 
dustries a  rise  in  prices.  In  the  exporting  industries  the  higher 
wages  will  be  the  result  of  higher  prices ;  but  in  other  industries 
higher  prices  will  be  as  much  a  result  as  a  cause  of  higher  wages. 
The  process  of  adjustment  and  enhancement  will  probably  be  slow 
and  uneven,  and  will  take  time.  In  an  immobile  country,  where 
custom  and  tradition  have  a  strong  hold  on  prices  and  wages,  it 
may  take  a  generation.  Even  in  a  mobile  modern  country,  it  will 
take  years.  But  domestic  prices  will  be  higher  in  the  end  than  they 
would  otherwise  have  been.  This,  no  doubt,  is  the  sense  which  the 
older  economists  really  had  in  mind  when  they  set  forth  that  a 
country  having  favorable  terms  of  international  trade  would 
possess  high  prices.  But  their  mode  of  stating  the  case  might  be 
easily  understood  to  mean  that  domestic  prices  in  such  a  country 
were  higher  than  prices  of  the  same  things  in  other  countries,  which 
is  a  different  proposition,  and,  as  we  have  seen,  a  doubtful  one. 

Further,  it  is  not  certain  that  under  the  conditions  thus  assumed 
domestic  prices  will  rise  at  all.  Pari  passu  with  the  rise  of  money 
wages  due  to  the  country's  better  position  in  international  trade, 
there  may  be  improvements  in  the  arts  or  the  opening  of  new  re- 
sources, which  will  reduce  domestic  prices  or  prevent  them  from 
rising.  Given  this  force  in  operation  on  domestic  prices  at  the  same 
time  with  a  turn  in  international  trade  causing  money  incomes  to 
rise,  and  the  parallel  movement  of  wages  and  prices  will  be  broken. 
Such  was  the  general  trend  —  rising  wages  and  falling  prices — 
through  the  last  thirty  years  of  the  nineteenth  century ;  it  may  prove 
to  be  again  the  trend  before  the  close  of  the  present  century. 


WAGES  AND  PRICES  119 

The  experience  of  the  United  States  during  the  last  quarter  of 
the  nineteenth  century  serves  to  illustrate  the  principles  just  stated, 
precisely  as  the  general  range  of  our  domestic  prices  has  served 
to  illustrate  the  relation  between  international  trade  and  domestic 
prices.  A  striking  phenomenon  in  the  international  trade  of  the 
United  States  during  this  period  was  the  insistent  demand  of  foreign 
countries  for  our  exports  ;  and  at  no  time  was  this  more  striking 
than  during  the  closing  years  of  the  century.  The  main  items  in 
our  exports  are  still  the  great  agricultural  staples :  cotton,  wheat 
and  flour,  other  grains,  meat  and  meat  products.  These  are  neces- 
saries, or  articles  of  enjoyment  so  habitually  in  use  that  they  are 
very  reluctantly  dispensed  with.  The  increase  of  population  and 
the  slow  steady  rise  in  the  standard  of  comfort  the  world  over,  and 
particularly  in  European  countries,  caused  an  unrelaxing  growth  in 
the  demand  for  them — a  demand  checkered  indeed  by  the  accidents 
of  seasons  and  crops,  and  by  the  oscillations  of  industrial  activity, 
but  on  the  whole  advancing  without  relaxation.  So  far  as  our  im- 
ports are  concerned,  some  are  in  similar  strong  demand  on  our  part : 
coffee,  sugar,  tea,  are  insistently  called  for.  But  the  imports  of 
manufactures  are  mainly  in  a  different  case.  They  are  articles 
easily  dispensed  with,  more  quickly  dropped  when  their  prices  are 
high  or  times  are  hard,  less  easily  stimulated  to  further  use  when 
their  prices  are  lowered.  All  this  brings  it  about  that  our  exports 
are  more  easily  and  certainly  disposed  of  abroad  than  imports  are 
disposed  of  here.  Hence  specie  tends,  on  the  whole,  to  flow  to  this 
country  (or,  what  comes  to  the  same  thing,  the  domestic  output 
of  specie  is  retained  within  our  borders),  and  money  wages  and 
domestic  prices  tend  to  be  high.  That  is,  money  wages  tend  to  be 
high  as  compared  with  foreign  countries,  and  domestic  prices  tend 
to  be  high  as  compared  with  what  they  otherwise  would  have  been 
in  our  own  country. 

The  forces  which  have  brought  about  these  consequences  have  not 
acted  with  uniform  pressure.  There  has  been  a  succession  of  pushes. 
Recurrently,  periods  have  come  when  large  crops  of  cereals  in  the 
United  States  have  coincided  with  short  crops  in  Europe  or  when 
the  American  cotton  crop  has  declined  or  failed  to  grow.  Then  the 
insistent  European  demand  has  made  itself  felt  with  sudden  effect. 
Exports  have  swollen  and  have  exceeded  the  imports ;   specie  has 


120  TAUSSIG 

flowed  in ;  a  period  of  excitement,  rising  prices  and  speculation,  has 
begun.  Such  was  the  nature  of  the  upward  movement  of  189 7-1 903. 
The  revival  of  activity  after  the  depression  of  1893-97  was  due  to 
the  slowly  gathering  demand  for  the  staple  exports ;  and  the  main- 
tenance of  activity  was  due  fundamentally  to  the  same  increasing 
demand.^  Hence  imports  of  specie,  retention  of  the  domestic  specie 
product,  rising  wages,  rising  prices.  The  rise  in  money  incomes  was 
well-nigh  universal.  The  rise  in  domestic  prices  was  less  so,  because 
offset  here  and  there  by  improvements  in  the  arts.  All  the  de- 
mands of  trade  unions  and  all  the  scales  of  higher  wages  were 
immensely  promoted  by  these  conditions,  if,  indeed,  they  were  not 
mainly  caused  by  them.  Labor  unions,  strikes,  trade  agreements, 
were  the  mechanism  by  which  the  fundamental  cause  has  worked 
out  its  effect.  That  mechanism,  no  doubt,  has  important  independ- 
ent effects  of  its  own ;  but  it  is  not  to  be  supposed  the  sole  force 
or  the  strongest  force  in  operation. 

The  favorable  position  which  the  United  States  thus  has  in  inter- 
national trade  reacts  on  the  effects  of  the  protective  system.  That 
system  has  checked  the  demand  for  imports,  and  made  it  more  diffi- 
cult for  foreign  countries  to  provide  the  wherewithal  for  discharging 
their  obligations  on  account  of  the  exports  which  they  want  so 
insistently.  The  result  has  been  that  money  incomes  in  the  United 
States,  which  would  be  high  in  any  case,  have  been  pushed  even 
higher ;  and  thus  domestic  prices  also  have  been  held  higher.  On 
the  other  hand,  the  prices  of  imported  goods  have  been  depressed  — 
either  actually  lowered  or  kept  lower  than  they  would  have  been 
— and  the  people  of  the  United  States  have  gained  as  consumers  of 
imported  goods.  So  far  as  they  have  been  successful  in  stimulating 
the  domestic  production  of  goods  that  would  otherwise  have  been 
imported — that  is,  so  far  as  the  protective  system  has  achieved  its 
avowed  effect — this  gain  has  been  simply  thrown  away,  and  a  loss 
has  been  substituted  for  it.  But  so  far  as  importation  has  continued, 
the  gain  has  been  really  secured.  Many  imports  come  in  over  the 
tariff  barrier.    These  of  course  are  raised  in  price  over  the  foreign 

^See  the  excellent  analysis  of  the  economic  history  of  the  United  States 
during  this  period  by  A.  D.  Noyes,  in  the  Quarterly  Journal  of  Economics, 
Vol.  XIX,  February,  1005.  Compare  also  the  article  by  A.  P.  Andrew  in  the 
same  journal,  May,  1906. 


WAGES  AND  PRICES  121 

price  by  the  extent  of  the  duties ;  but  the  treasury  then  gains  what 
the  consumers  pay,  and  other  taxes  are  presumably  dispensed  with ; 
and  the  foreign  price  itself  is  lower  than  it  would  otherwise  have 
been.  As  to  duty-free  imports,  there  is  obviously  a  clear  gain.  They 
are  lower  in  price,  and  the  money  incomes  for  buying  them  are 
higher.  Whether  the  loss  in  buying  the  home-made  protected  com- 
modities outweighs  the  gain  in  buying  the  commodities  that  continue 
to  be  imported  is  quite  impossible  of  calculation.  The  ardent  pro- 
tectionist might  find  in  this  sort  of  reasoning  a  tenable  ground  for 
supporting  his  policy  in  a  country  situated  as  the  United  States 
has  been ;  but  few  protectionists  follow  the  strict  logic  of  economics 
far  enough  to  perceive  the  advantage  which  they  might  thus  vaunt. 

A  last  word  may  be  said  as  to  the  relation  of  all  this  reasoning 
to  the  modern  development  of  the  theory  of  value,  and  more  espe- 
cially to  the  question  how  far  value  depends  at  bottom  on  utility, 
how  far  on  sacrifice.  The  Ricardian  assumption — tacitly  followed 
in  the  preceding  pages — was  that  in  domestic  exchanges  values  and 
prices  depended  on  sacrifice,  on  labor.  Those  commodities,  it  was 
supposed,  whose  labor  cost  was  low  would  be  low  in  price,  and  so 
would  tend  to  be  exported.  But  do  value  and  price  depend  on  labor 
cost?  Are  there  not,  to  use  Cairnes's  convenient  phrase,  non- 
competing  groups?  And  is  not  utility  the  permanent  regulator  of 
value?  If  so,  what  of  the  reasoning  which  assumes  that  effective- 
ness and  labor  cost  determine  which  commodities  shall  be  cheap  in 
money,  and  so  shall  be  exported  from  a  country. 

Some  allowance  for  this  turn  in  the  reasoning  was  made  by  the 
older  economists.  Exceptionally  low  wages  in  any  particular  indus- 
try, it  was  pointed  out,  had  the  same  effect  in  international  trade  as 
low  labor  cost.  Either  served  to  give  a  comparative  advantage,  and 
to  cause  a  commodity  to  take  its  place  in  the  list  of  exports.  Slave- 
grown  articles  were  commonly  used  to  illustrate  this  exception.  But 
an  exception  it  was  still  thought  to  be.  In  the  main,  labor  cost 
determined  value  within  a  country,  and  so  determined  what  goods 
should  be  exported.  But,  if  there  be  no  free  movement  of  labor 
from  group  to  group,  and  no  correlation  of  capitalists'  expenses  to 
labor  cost,  will  not  the  whole  theory  of  international  trade  need  to 
be  overhauled? 


122  TAUSSIG 

The  answer  to  this  question  is  twofold.  In  the  first  place,  there 
probably  is  more  competition  among  laborers  than  the  bare  assump- 
tion of  non-competing  groups  admits.  Briefly  to  state  my  own  view 
on  this  crucial  matter,  I  do  not  believe  that  competition  among 
workers  is  so  free  as  to  bring  about  an  equalization  of  reward,  and 
to  adjust  wages  to  sacrifice.  There  are  effective  obstacles  to  free 
movement.  There  are,  in  so  far,  non-competing  groups ;  and  value 
is  proximately  determined  by  utility,  not  sacrifice.  But  the  barriers 
between  groups  are  not  impassable.  The  higher  the  differences  in 
reward,  the  greater  the  number  who  get  over  the  barriers  and  in- 
crease the  supply  in  the  favorably  situated  groups.  Hence  labor 
cost,  sacrifice,  are  always  in  the  background,  so  to  speak,  and  pre- 
vent the  sway  of  utility  over  value  from  being  unqualified.  The 
greater  the  deviation  of  value  from  equivalence  to  sacrifice,  the  less 
is  it  likely  to  persist.  In  the  long  run,  competition  between  workers 
exercises  not  a  dominating,  but  a   correcting   influence. 

However  this  may  be,  there  is  a  second  reason  why  the  theory  of 
international  trade  does  not  need  on  this  score  serious  modification. 
Goods  are  rarely  made  by  workers  of  one  grade  only.  The  day 
laborer  does  not  make  one  thing,  the  mechanic  another,  the  engineer 
a  third.  They  join  in  the  combined  labor  applied  to  all  the  various 
commodities.  Now,  if  the  relations  of  the  different  grades  to  each 
other  are  the  same  in  different  countries,  and  if  the  same  combina- 
tions of  labor  are  used  for  any  one  article,  the  conditions  of  compe- 
tition between  the  countries  are  precisely  the  same  as  if  within  each 
country  labor  cost  alone  determined  value.  If  the  earnings  of  en- 
gineers are  twice  as  high  as  those  of  mechanics  in  all  the  countries, 
and  the  earnings  of  mechanics  twice  as  high  as  those  of  day  laborers, 
and  if,  moreover,  the  same  combination  of  the  labor  of  all  three  is 
used  throughout  in  making  the  same  commodity,  then  those  things 
will  be  cheap  which  are  produced  in  a  given  country  with  compara- 
tively little  labor,  and  those  things  will  be  dear  which  are  produced 
with  comparatively  much.  The  former  will  tend  to  be  exported,  and 
the  latter  will  tend  to  be  imported. 

It  is  not  to  be  supposed  that  there  is,  among  different  countries, 
such  absolute  identity  either  in  the  relations  of  the  different  grades 
of  labor  as  has  just  been  assumed  or  in  the  way  in  which  the 
grades  are  combined  for  the  operations  of  production.    Though  the 


WAGES  AND  PRICES  123 

phenomena  of  social  stratification  are  on  the  whole  similar  in  the 
civilized  countries,  new  and  old,  there  may  be  important  differences. 
A  particular  group  of  workmen  may  be  in  higher  demand  in  one 
country  than  in  another.  Their  wages  may  be  particularly  high  in 
the  first  country.  If  so,  though  their  labor  may  be  efficient,  its 
product  will  be  comparatively  dear  in  price.  On  the  other  hand, 
a  particular  kind  of  labor  may  be  so  abundant  as  to  be  cheap  in 
one  country.  Its  labor  may  be  paid  for  on  a  scale  which  is  low  as 
compared  with  the  general  scale  in  that  country ;  and  then  the  effect 
is  precisely  the  same  on  international  trade  as  if  such  labor  were 
comparatively  efficient. 

Conditions  of  this  kind  seem  to  have  developed  in  the  German 
chemical  industry,  and  to  have  constituted  an  important  factor  in 
its  remarkable  development  during  the  period  preceding  the  war. 
Chemists  were  cheap — unusually  cheap.  The  industry  had  at  its 
disposal  a  highly  trained  technical  staff,  at  wages  relatively  low. 
The  effect  on  trade  was  the  same  as  if  the  staff  had  been  unusually 
efficient ;  the  chemical  products  could  be  put  on  the  market  at 
prices  relatively  low.  Probably  the  staff  was  in  fact  not  only  cheap, 
but  at  least  as  good  as  in  other  countries.  Either  advantage,  that 
of  cheapness  or  that  of  efficiency,  when  particularly  marked  in  a 
given  industry,  serves  to  promote  the  export  of  that  industry's 
products. 

I  suspect  that  a  similar  situation  has  appeared  in  the  United 
States  in  recent  times — a  situation  in  which  a  particular  kind  of 
labor  has  been  paid,  if  not  at  decreasing  rates,  yet  at  rates  that  have 
failed  to  advance  in  accord  with  the  general  rise  in  money  incomes. 
Broadly  speaking,  the  pay  of  unskilled  manual  labor  did  not  keep 
pace  with  the  general  movement ;  relatively,  it  declined.  Most 
money  incomes  advanced  in  the  United  States,  and  the  incomes  of 
skilled  mechanics  advanced  very  considerably.  But  the  wages  of 
ordinary  day  labor,  and  of  such  factory  labor  as  is  virtually  un- 
skilled, seem  to  have  remained  stationary,  and  sometimes  seem 
even  to  have  fallen.  The  explanation  undoubtedly  is  that  immi- 
gration on  a  huge  scale  steadily  maintained  the  supply  of  such 
labor.  The  pressure  for  employment  on  the  part  of  the  newly 
arrived  kept  down  the  pay  for  the  simple  sort  of  work  they  could 
turn  to. 


124  TAUSSIG 

The  consequence  was  that  industries  making  large  use  of  such 
labor  were  in  a  better  situation  than  they  had  been  before,  and  held 
their  own  against  foreign  competition  more  easily.  The  general 
conditions  in  the  United  States  tend  to  give  a  comparative  advan- 
tage to  those  industries  that  employ  highly  skilled  labor  in  larger 
proportion  —  those  that  use  machinery  in  whose  construction  and 
operation  such  labor  plays  a  major  part ;  for  it  is  here  that  Ameri- 
can industry,  taken  as  a  whole,  has  proved  to  have  special  effec- 
tiveness, i.  e.,  a  comparative  advantage.  But  if  unskilled  labor  is 
relatively  cheap — at  a  greater  discount,  so  to  speak,  than  in  com- 
peting foreign  countries — the  employer  may  still  be  able  to  use  it 
with  profit  in  competition  with  the  foreigners.  One  of  the  striking 
changes  in  the  economic  development  of  the  United  States  during 
the  last  generation  was  the  growth  of  manufactures  using  such  labor, 
the  steady  decline  in  the  prices  of  their  products,  and  their  lessening 
dependence  on  support  from  the  protective  tariff.  Such  were  the 
manufactures  of  pottery  in  its  cheaper  grades,  of  silk  goods,  of 
textiles  in  general.  The  cheapening  of  bituminous  coal  and  of  coke 
seems  to  have  been  part  of  the  same  phenomenon.  The  boasted 
advance  of  manufacturing  industries  was  thus  due  in  some  degree 
to  a  change,  not  entirely  welcome,  in  social  conditions.  No  doubt 
other  causes  also  contributed :  the  discovery  and  utilization  of  great 
natural  resources,  improvements  in  methods  and  machinery  more 
rapid  than  the  improvements  in  foreign  countries,  and  protective 
duties  pushed  up  to  the  highest  limit.  But  it  remained  true  that 
the  comparative  degradation  of  the  lowest  stratum  in  the  social 
structure  was  a  contributing  factor. 

A  situation  of  this  sort  is  not  likely  to  endure  indefinitely,  least 
of  all  in  a  country  like  ours,  where  the  general  conditions  promote 
mobility  of  labor.  Moreover,  legislation  for  checking  the  continuing 
inflow  of  immigrants,  such  as  that  of  the  illiteracy  test,  tends  to 
rernove  the  underlying  cause.  It  would  be  idle  to  speculate  on  the 
movements  of  population  that  will  follow  the  war  in  Europe  or 
America,  the  changes  in  the  rates  of  wages,  the  coming  industrial 
conditions.  The  case,  as  it  stood  for  a  considerable  period,  serves 
to  illustrate  how  differences  in  wages,  to  the  extent  that  they  are 
more  marked  in  one  country  than  in  another,  influence  relative 
prices  and  therefore  the  currents  of  international  trade. 


WAGES  AND  PRICES  125 

To  sum  up  the  main  thesis :  so  far  as  there  is  great  effectiveness 
of  labor,  there  will  be  low  prices  of  those  among  a  country's  products 
which  come  within  the  sphere  of  international  trade,  and  such 
products  will  be  exported.  This  much  is  familiar  doctrine.  Domes- 
tic commodities,  so  far  as  produced  with  the  same  effectiveness,  will 
also  be  low  in  price ;  if  not  so  produced,  will  be  high  in  price.  This  is 
less  familiar  doctrine.  And  high  money  wages,  in  the  last  analysis, 
are  the  consequence  not  of  general  effectiveness,  but  of  that  which 
is  found  more  especially  in  the  production  of  exported  goods. 


TAUSSIG:  THE  PRINCIPLE  OF  COMPARATIVE 

ADVANTAGE^ 

The  doctrine  of  comparative  advantage, — or,  in  the  phrase 
more  commonly  used  by  the  older  school,  of  comparative  cost, — has 
underlain  almost  the  entire  discussion  of  international  trade  at  the 
hands  of  the  British  school.  It  has  received  singularly  little  attention 
from  the  economists  of  the  Continent,  and  sometimes  has  been  dis- 
cussed by  them  as  one  of  those  subtleties  that  have  little  bearing  on 
the  facts  of  industry.  I  believe  that  it  has  not  only  theoretical  con- 
sistency, but  direct  application  to  the  facts;  and  that  in  particular 
it  is  indispensable  for  explaining  the  international  trade  of  the 
United  States  and  the  working  of  our  tariff  policy.  Neither  the 
familiar  arguments  heard  in  our  controversy  nor  the  course  of  our 
industrial  history  can  be  understood  unless  the  principle  of  com- 
parative advantage  is  clearly  understood  and  kept  steadily  in  view. 

Briefly  stated,  the  doctrine  is  that  a  country  tends  under  condi- 
tions of  freedom  to  devote  its  labor  and  capital  to  those  industries  in 
which  they  work  to  greatest  effect.  It  will  be  found  unprofitable  to 
turn  to  industries  in  which,  though  labor  and  capital  may  be  em- 
ployed with  effect,  they  are  applied  with  less  effect  than  in  the  more 
advantageous  industries.  The  principle  is  simple  enough,  nor  is  it 
applicable  solely  to  international  trade.  The  conversant  reader  does 
not  need  to  be  told  that  it  bears  on  the  division  of  labor  between 
individuals  as  well  as  on  that  between  nations.  The  lawyer  finds 
it  advantageous  to  turn  over  to  his  clerk  that  work  which  he  could 

IF.  W.  Taussig,  Some  Aspects  of  the  Tariff  Question   (1915),  chap.  iii. 


126  TAUSSIG 

do  as  well  as  the  clerk,  or  even  better,  confining  himself  to  the 
tasks  in  the  profession  for  which  he  has  by  training  or  inborn  gift 
still  greater  capacity.  The  able  business  leader  delegates  to  foremen 
and  superintendents  routine  work  of  administration  that  he  could 
doubtless  do  better  than  they ;  he  reserves  himself  for  the  larger 
problems  of  business  management  for  which  he  has  special  aptitude. 
The  skilled  mechanic  often  has  a  helper  to  whom  he  delegates  the 
simpler  parts  of  his  trade,  giving  his  own  attention  to  those  more 
difficult  parts  in  which  he  has  marked  superiority. 

In  international  trade,  however,  the  principle,  if  not  most  im- 
portant, needs  most  attention ;  because  it  is  obscured  by  the 
extraordinary  persistence  of  prejudice  and  of  shallow  reasoning 
in  this  part  of  economics.  Simple  as  it  is  in  its  statement  and  in 
its  more  obvious  applications,  it  extends  to  some  complex  and 
difficult  problems,  and  more  particularly  to  those  concerning  the 
varying  ranges  of  prices  and  wages  in  different  countries.  There 
is  perhaps  no  topic  in  economics  on  which  there  is  more  of  popular 
confusion  than  on  this ;  nor  can  it  be  said  that  there  is  always 
careful  and  consistent  thinking  on  it  among  economists  who  con- 
temn the  popular  superficialities.  Though  fallacies  of  much  the 
same  sort  are  prevalent  in  all  countries,  the  United  States  is  above 
all  that  for  which  the  principle  is  most  important  and  for  which 
there  is  most  need  of  explaining  the  connection  between  prices, 
wages,  and  the  currents  of  international  trade. 

Whatever  the  differences  of  opinion  among  economists  on  the 
theory  of  wages, —  and  those  differences  are  less  in  reality  than 
in  appearance, —  there  is  agreement  that  a  high  general  rate  of 
wages  rests  upon  general  high  product,  on  high  effectiveness  of 
industry.  It  is  not  necessary  here  to  enter  on  the  question  whether, 
in  speaking  of  the  effectiveness  of  industry,  we  should  consider 
precisely  in  what  way  it  can  be  said  to  be  based  on  the  several 
factors  in  production,  or  caused  by  them.  Some  economists  regard 
capital  and  natural  resources  (land)  as  distinct  factors,  contributing 
each  its  specific  share  to  the  total  product  of  industry.  Others 
regard  them  simply  as  means  or  conditions  for  enabling  labor  to 
work  with  effect  and  so  to  turn  out  a  large  product.  The  latter 
seems  to  me  the  better  way  of  stating  the  case, — that  labor  is  the 
fundamental  agent  in  production ;  but  for  the  present  purpose  it  is 


COMPARATIVE  ADVANTAGE  127 

not  material  which  form  of  statement  is  preferred.  It  is  agreed 
among  the  careful  thinkers  on  economics  that  high  general  wages  and 
a  high  degree  of  material  prosperity  can  result  only  from  the  pro- 
ductive application  of  labor ;  good  tools  or  good  natural  resources, 
or  both,  being  indispensable  to  high  productivity.  And  when  "labor" 
is  spoken  of,  it  must  be  remembered  that  not  only  manual  labor  is 
meant,  but  the  equally  important  labor  of  organizing  and  directing 
the  rank  and  file.  In  the  United  States  more  particularly,  the  gen- 
eral effectiveness  of  labor  depends  in  great  degree  on  the  work  of 
the  industrial  leaders. 

Now  when  there  prevails  a  general  high  range  of  wages,  due  to 
generally  productive  application  of  labor,  this  high  rate  comes  to 
be  considered  a  difficulty, — an  obstacle.  The  business  point  of 
view  is  commonly  taken  in  these  matters  not  only  by  the  business 
men  themselves,  but  by  the  rest  of  the  community.  To  have  to  pay 
high  wages  is  a  discouraging  thing  in  business ;  does  it  not  obviously 
make  expenses  high,  and  competition  difficult  ?  People  do  not  reflect 
that  wages  are  not  high  as  a  matter  of  course.  If  they  are  in  general 
high,  there  must  be  some  general  cause.  Once  established,  they  are 
taken  in  a  country  like  the  United  States  as  part  of  the  inevitable 
order  of  things.  The  ordinary  man  does  not  stop  to  consider  why 
they  should  exist  at  all.  He  regards  them  as  something  he  must  face, 
and  too  often  as  something  that  constitutes  a  drawback  in  industry. 

When  speaking  of  wages  as  high,  we  may  have  in  mind  either 
money  wages  or  commodity  wages  ("real"  wages,  in  the  older 
phrase).  It  is  familiar  to  all  that  money  wages  are  higher  in  the 
United  States  than  in  Europe ;  and  it  is  almost  as  familiar  that 
the  greater  money  wages  are  by  no  means  completely  offset  by 
higher  prices,  and  that  there  remains  a  large  advantage  in  real  or 
commodity  wages.  Let  us  center  attention  for  the  moment  on  this 
latter  and  more  substantial  advantage, — the  higher  commodity  wages. 

It  is  obvious  that  higher  commodity  wages  cannot  be  handed  over 
to  workmen  by  employers  unless  the  workmen  (as  guided  by  the 
employers  and  aided  by  tools  and  machines)  turn  out  a  large 
product, — unless  there  is  greater  effectiveness  of  industry.  I  say 
effectiveness,  not  efficiency,  because  the  latter  word  has  come  to  be 
used  so  often  to  denote  one  particular  factor  that  bears  on  the 
quantity    of    product, —  the    immediate    efficiency    of    the    manual 


128  TAUSSIG 

workers ;  by  no  means  the  sole  or  even  the  commanding  factor.  In 
current  discussions  on  the  tariff  and  wages,  it  has  often  been  alleged 
that  in  one  industry  or  another  the  efficiency  or  skill  of  the  workmen 
is  no  greater  in  the  United  States  than  in  England  or  Germany  ; 
that  the  tools  and  machines  are  no  better,  the  raw  materials  no 
cheaper.  How  then,  it  is  asked,  can  the  Americans  get  higher  wages 
unless  protected  against  the  competition  of  the  Europeans?  But, 
it  may  be  asked  in  turn :  suppose  all  the  Americans  were  not  a  whit 
more  skilful  and  productive  than  the  Europeans, — perhaps  quite 
as  skilful,  but  not  more  so ;  suppose  the  plane  of  effectiveness  to  be 
precisely  the  same  throughout  the  realm  of  industry  in  the  coun- 
tries compared ;  how  could  wages  be  higher  in  the  United  States  ? 
The  source  of  all  the  income  of  a  community  obviously  is  in  the 
output  of  its  industry.  If  its  industry  is  no  more  effective,  if  its 
labor  produces  no  more,  than  in  another  community,  how  can  its 
material  prosperity  be  greater  and  how  can  wages  be  higher?  A  high 
general  rate  of  real  wages  could  not  possibly  be  maintained  unless 
there  were  in  its  industries  at  large  a  high  general  productiveness. 

But  when  once  these  two  concomitant  phenomena  have  come  to 
exist, —  a  high  effectiveness  of  industry  and  a  high  general  rate  of 
wages, —  it  follows  that  any  industry  in  which  labor  is  not  effective, 
in  which  the  plane  of  effectiveness  is  below  that  in  most  industries, 
finds  itself  from  the  business  point  of  view  at  a  disadvantage.  It 
must  meet  the  general  scale  of  wages  in  order  to  attract  workmen ; 
yet  the  workmen  do  not  produce  enough  to  enable  that  general 
scale  to  be  met  and  a  profit  still  secured.  Such  an  industry,  in  the 
terms  of  the  principle  now  under  discussion,  is  ipso  facto  working  at 
a  comparative  disadvantage.  In  other  industries,  product  is  high ; 
that  is,  labor  cost  per  unit  is  low.  In  this  industry,  product  is  low ; 
labor  cost  is  high.  The  industry  does  not  measure  up  to  the 
country's  standard,  and  finds  in  that  standard  an  obstacle  to 
its  prosecution. 

Consider  the  same  problem, —  the  relation  between  wages,  costs, 
prices, —  from  the  point  of  view  of  money  wages.  Here  again  we 
are  beset  by  everyday  fallacies  and  superficialities.  High  money 
wages,  it  is  commonly  alleged,  cannot  be  paid  unless  there  be  high 
prices  for  the  goods  made.  A  dear  man  is  supposed  to  mean  a  dear 
coat,  and  a  cheap  jjian  a  cheap  coat.    Yet  it  is  beyond  dispute  that 


COMPARATIVE  ADVANTAGE  129 

in  the  United  States,  while  money  wages  are  higher  than  in  European 
countries,  the  prices  of  things  bought  are  on  the  whole  not  higher. 
Though  some  things  cost  more,  and  higher  money  wages  therefore 
do  not  mean  commodity  wages  higher  in  the  same  degree,  real  wages 
remain  higher  by  a  substantial  amount.  The  dear  man  may  perhaps 
mean  a  dear  coat, — of  this  we  shall  learn  more  when  we  come  to 
consider  the  domestic  conditions  of  production  for  clothing ;  but  the 
dear  man  certainly  does  not  mean  dear  food,  and  probably  does  not 
mean  a  dear  house.  The  explanation  is  simple :  though  wages  in 
money  are  high,  the  effectiveness  of  the  dear  man's  labor  on  the 
whole  is  also  high,  and  therefore  goods  on  the  whole  are  not  dear. 
Where  a  man  who  is  paid  high  wages  turns  out  a  larger  number  of 
pieces,  each  piece  can  be  sold  at  a  low  price,  and  the  employer  still 
can  afford  to  pay  the  high  wages.  With  reference  to  individuals,  the 
business  world  is  constantly  accepting  this  principle.  A  good  man, 
we  are  told,  is  cheap,  even  at  high  wages.  To  use  the  same  phrase, 
a  good  industry  is  cheap  even  though  high  wages  are  paid  in  it. 
Where  labor  is  effective,  high  wages  and  low  prices  go  together. 

None  the  less,  an  established  high  rate  of  wages  always  presents 
itself  to  the  individual  employer  as  a  difficulty  that  has  to  be  over- 
come. And  to  the  employee  it  presents  itself  as  a  thing  in  danger, — 
something  that  must  always  be  jealously  guarded.  Yet  it  is  a  real 
difficulty  for  the  employer  only  where  the  effectiveness  of  labor  is 
not  great ;  and  for  the  employees  also  it  needs  no  protection,  so  far 
as  the  competition  of  foreign  products  is  concerned,  where  this  same 
essential  condition  is  found.  If,  indeed,  such  effectiveness  does  not 
exist,  then  the  American  employer  cannot  pay  the  prevailing  high 
rate  of  wages,  and  hold  his  own  in  free  competition  with  producers 
in  countries  of  lower  wages.  In  other  words,  he  cannot  hold  his  own 
unless  there  is  the  comparative  advantage  in  his  particular  industry. 
The  prevalence  of  a  general  high  rate  of  wages  is  due  to  the  fact 
that  in  the  dominating  parts  of  the  country's  industrial  activity  the 
comparative  advantage  exists.  These  dominating  industries  set  the 
pace ;  in  them  we  find  the  basis  of  the  high  scale  of  remuneration ; 
it  is  they  which  establish  a  standard  which  others  must  meet,  and 
which  to  the  others  presents  itself  as  an  obstacle. 

Some  further  explanation  of  these  general  statements  is  neces- 
sary before  they  can  be  made  to  fit  all  the  facts.  What  has  just  been 


13  o  TAUSSIG 

said  of  dominating  industries  holds  only  as  regards  those  industries 
and  those  commodities  which  play  a  part  in  international  trade. 

For  sundry  reasons,  many  articles  do  not  come  within  the  range 
of  international  dealings.  It  is  out  of  the  question  that  they  should 
be  exported  or  imported.  Such  are  bulky  articles,  not  readily 
transportable  for  any  distance,  like  bricks ;  these  are  necessarily 
produced  near  the  spot  where  they  are  used.  Such  again  are  articles 
greatly  affected  by  national  habit,  like  furniture  or  household 
utensils;  and, —  to  mention  a  highly  important  class, — such  are 
houses  and  house-room,  which  must  be  provided  once  for  all  by 
domestic  labor.  Things  of  this  sort  may  or  may  not  be  higher  in 
price  than  they  are  in  foreign  countries.  They  are  made  by  labor 
which  is  paid  the  current  high  rates  of  money  wages.  If  that  labor 
is  more  effective  than  in  foreign  countries,  the  commodities  will 
yet  be  lower  in  price  than  abroad.  But  if  that  labor  is  not  effective 
as  compared  with  similar  labor  in  foreign  countries,  the  commodities 
will  be  higher  in  price.  Domestic  commodities,  therefore, —  meaning 
by  that  phrase  the  commodities  which  are  necessarily  produced 
within  the  country, — may  be  higher  in  price  than  they  are  in 
foreign  countries,  or  the  same  in  price,  or  even  lower  in  price, 
according  to  the  effectiveness  of  the  labor  engaged  in  producing 
them.  If  by  some  change  in  the  underlying  conditions, — say,  an 
extraordinary  cheapening  of  transportation, — their  importation 
were  to  become  feasible,  the  employer  would  find  it  impossible 
to  compete  with  foreigners  unless  there  was  the  same  effective- 
ness of  industry  in  producing  them  as  there  was  in  the  dominant 
industries. 

As  regards  commodities  potentially  within  the  range  of  inter- 
national trade, — and  with  these  alone  the  tariff  controversy  is 
concerned, —  the  principle  of  comparative  advantage  applies  more 
fully  and  unequivocally  to  the  United  States  than  to  any  country 
whose  conditions  are  known  to  me.  The  difference  in  money  wages 
between  the  United  States  and  European  countries  is  marked  ;  the 
difference  in  commodity  wages,  though  not  so  great,  none  the  less 
is  also  marked.  Notwithstanding  these  high  wages,  constituting  an 
apparent  obstacle  or  handicap  for  the  domestic  producer,  the  United 
States  steadily  exports  all  sorts  of  commodities ;  not  only  agricul- 
tural products,  but  manufactures  of  various  kinds.    Evidently  they 


COMPARATIVE  ADVANTAGE  131 

could  not  be  exported  unless  they  were  sold  abroad  as  cheaply  as 
foreign  goods  of  the  same  sort  are  there  sold.  That  these  products 
of  highly  paid  labor  are  exported  and  are  sold  cheap,  is  proof  that 
American  industry  has  in  them  a  comparative  advantage.  There  are 
other  goods  which,  though  not  exported,  are  also  not  imported ; 
goods  where  the  balance  of  advantage  is  even,  so  to  speak.  They  are 
not  such  as  are  ruled  out  of  the  sphere  of  international  trade  once 
for  all,  because  of  great  bulk  or  necessity  of  production  in  situ  ;  they 
might  conceivably  be  imported ;  yet  in  fact  they  are  not  imported. 
These  are  the  products  of  industries  in  which  American  labor  is 
effective,  yet  not  effective  to  the  highest  pitch ;  effective  in  pro- 
portion to  the  higher  range  of  money  wages  in  the  country,  but 
barely  in  that  proportion.  And  finally  there  are  the  goods  whose 
importation  continues,  even  though  there  is  no  obvious  obstacle  to 
their  domestic  production  from  soil  or  climate.  These  are  things 
which,  it  would  seem,  could  be  produced  to  as  good  advantage  at 
home  as  abroad.  They  could  be  produced  to  as  good  advantage ; 
but  they  lack  the  comparative  advantage.  They  do  not  measure  up 
to  the  standard  set  by  the  dominant  industries.  The  obstacle  to 
their  successful  prosecution  within  the  country  is  not  physical  but 
economic.  It  is  they  which  find  in  high  wages  an  insuperable  diffi- 
culty. In  this  class  belong  the  industries  which  are  protected,  and 
which  would  not  hold  their  own  without  protection.  They  are  in  a 
position  analogous  to  that  of  the  strictly  domestic  industries  in  which 
labor  is  not  effective,  but  which,  being  carried  on  of  necessity  within 
the  country,  have  high  prices  made  necessary  by  high  money  wages. 
The  obvious  difference  between  the  two  cases  is  that  the  force  which 
causes  the  strictly  domestic  industries  to  be  carried  on  is  an  unalter- 
able one,  such  as  the  difficulty  or  impossibility  of  transportation; 
while  that  which  causes  the  protected  industry  to  become  domesti- 
cated is  the  artificial  one  of  a  legislative  barrier. 

What,  now,  are  the  causes  of  industrial  effectiveness  and  com- 
parative advantage?  To  put  the  question  in  other  words,  what 
are  the  industries  in  which  a  comparative  advantage  is  likely  to 
appear?  and,  more  particularly,  in  what  directions  is  the  labor  of 
the  people  of  the  United  States  likely  to  be  applied  with  special 
effectiveness? 


132  TAUSSIG 

The  more  common  answer  has  been,  in  agriculture.  A  new  coun- 
try, with  abundance  of  fertile  land,  finds  its  labor  most  effective  in 
the  extractive  industries.  Hence  the  United  States  long  were  steady 
exporters  of  wheat,  meat  products,  cotton.  Hence  Canada  is  now  a 
heavy  exporter  of  wheat.  Wheat  is  specially  adapted  to  extensive 
culture,  and  is  easily  transportable ;  it  is  the  commodity  for  which 
nature  gives  to  a  new  country  in  the  temperate  zone  a  clear  compara- 
tive advantage.  The  international  trade  of  the  United  States  was 
long  determined  chiefly  by  the  country's  special  advantages  for 
the  production  of  wheat  and  similar  agricultural  staoles. 

It  should  be  noted,  however,  that  not  only  th^^MuraLiesources 

6 told,  but  the  manner  in  which  they  were  used.  From  the  first, 
mventiveness  and  ingenuity  were  shown.  The  United  States  early 
became  the  great  country  of  agricultural  machinery.  Especially 
during  the  second  half  of  the  nineteenth  century,  the  skill  of  the 
makers  of  agricultural  implements  and  the  intelligence  of  the 
farmers  who  used  the  implements  were  factors  not  less  important 
than  the  greaL-s,tretches  of  new  land.  Still  another  factor  of  impor- 
tance was  th%3^eapening  oi_transportation.  From  the  very  begin- 
ning, the  Americans  have  been  energetic  and  successful  in 
overcoming  the  vast  distances  of  their  country.  Our  railroads  have 
cheapened  long  hauls  as  nowhere  else.  The  most  striking  improve- 
ments of  this  sort  were  made  in  the  last  third  of  the  nineteenth  cen- 
tury ;  then  new  lands  were  opened,  and  agricultural  products 
exported,  on  a  scale  not  before  thought  possible.  When  the  effec- 
tiveness of  labor  is  spoken  of,  the  effectiveness  of  all  the  labor  needed 
to  bring  an  article  to  market  is  meant ;  not  merely  that  of  the 
labor  immediately  and  obviously  applied  (like  that  of  the  farmer), 
but  that  of  the  inventor  and  maker  of  threshing-machines  and 
gang-plows,  and  that  of  the  manager  and  worker  on  the  railways  and 
ships.  In  other  industries  even  more  markedly  than  in  agriculture, 
the  labor  of  the  directing  heads,  of  the  planners  and  designers,  tells  in 
high  degree  for  the  final  effectiveness  of  the  labor  which  is  applied 
through  all  the  successive  stages. 

That  the  situation  began  to  change  with  the  opening  of  the 
twentieth  century  does  not  need  to  be  explained  at  length.  The 
period  of  limitless  free  land  was  then  passed,  and  with  it  the  pos- 
sibility of   increasing   agricultural   production  under   the  specially 


COMPARATIVE  ADVANTAGE  133 

advantageous  conditions  of  new  countries.  For  one  great  agri- 
cultural article — cotton — the  comparative  advantage  of  the  country 
indeed  maintained  itself,  and  its  exports  continued  to  play  a  great 
part  in  international  trade.  The  exports  of  other  agricultural  prod- 
ucts,—  wheat,  corn,  barley,  meat  products, — have  by  no  means 
ceased,  nor  will  they  cease  for  some  time.  But  they  tend  to  decline, 
absolutely  and  even  more  relatively.  Other  articles  grow  in  impor- 
tance, such  as  copper,  petroleum,  iron  and  steel  products,  various 
manufactures.  For  some  of  these, — copper,  for  example, —  the  rich- 
ness of  our  natural  resources  is  doubtless  of  controlling  importance. 
But  the  manner  in  which  those  natural  resources  are  turned  to 
account  is  in  all  cases  important ;  and  in  many  cases  the  comparative 
advantage  of  which  the  exports  are  proof  rests  not  on  the  favor  of 
nature  at  all,  but  solely  on  the  better  application  of  labor  under 
conditions  inherently  no  more  promising  than  those  of  other  coun- 
tries. What  are  the  causes  of  advantage  under  these  less  simple 
conditions? 

The  same  question  may  be  asked  regarding  a  closely-allied 
phenomenon,  referred  to  a  moment  ago.  A  considerable  range  of 
manufactured  articles,  though  not  exported,  are  yet  not  imported. 
The  domestic  manufacturer  holds  the  domestic  market  with  ease, 
while  paying  higher  wages  than  his  foreign  competitor.  The  range 
of  such  industries  is  wider  than  is  commonly  supposed.  It  is  ob- 
scured by  the  fact  that  our  tariff  system  imposes  needless  and 
inoperative  duties  on  a  quantity  of  things  which  would  not  be 
imported  even  in  the  absence  of  duties.  On  the  other  hand  there 
is  a  considerable  range  of  articles  on  which  the  duties  do  have 
substantial  effect, — articles  which  would  be  imported  but  for  the 
tariff.  Some  of  these  continue  to  be  imported  notwithstanding 
high  duties ;  they  pour  in  over  the  tariff  wall.  Why  the  difference 
between  the  two  sets  of  cases :  those  in  which  the  domestic  manu- 
facturer holds  his  own  irrespective  of  duties,  and  those  in  which 
he  needs  the  duties  or  even  is  beaten  notwithstanding  the  tariff 
support  ? 

The  answer  commonly  given  is  that  American  producers  can  hold 
their  own  more  easily  when  much  machinery  is  used.  Then,  it  is 
said,  the  wages  bill  forms  a  smaller  proportion  of  the  expenses  of 
production,  and  the  higher  wages  of  the  United  States  are  a  less 


134  TAUSSIG 

serious  obstacle.  But  it  requires  no  great  economic  insight  to  see 
that  this  only  pushes  the  question  back  a  step.  Why  is  not  the 
machinery  itself  more  expensive?  The  machinery  was  made  by 
labor.  It  is  a  commonplace  that  a  commodity  made  with  much 
use  of  machinery  is  the  combined  product  of  two  sets  of  laborers, — 
those  who  make  the  instruments  and  those  who  operate  them.  If  all 
those  whose  labor  is  combined  for  producing  the  final  result  are  paid 
higher  wages  than  in  foreign  countries,  why  cannot  the  foreigners 
undersell  where  much  machinery  is  used  as  well  as  where  little  is 
used  ? 

The  real  reason  why  Americans  are  more  likely  to  hold  their  own 
where  machinery  is  much  used,  and  where  hand  labor  plays  a  com- 
paratively small  part  in  the  expenses  of  production,  is  that  Amer- 
icans make  and  use  machinery  better.  They  turn  to  labor-saving 
devices  more  quickly,  and  they  use  devices  that  save  more  labor. 
Where  Americans  can  apply  machinery,  they  do  so ;  and  not  only  do 
so,  but  do  so  better,  on  the  whole,  than  their  foreign  competitors. 
The  question  remains  one  of  comparative  effectiveness.  Their  ma- 
chinery is  not  necessarily  cheaper ;  absolutely  often  it  is  dearer ;  but 
it  is  cheap  relatively  to  its  effectiveness.  It  is  better  machinery,  and 
the  labor  that  operates  it  turns  out  in  the  end  a  product  that  costs 
not  more,  but  less,  than  the  same  product  costs  in  countries  using  no 
such  devices,  or  using  devices  not  so  good. 

In  general,  it  may  be  laid  down  that  this  sort  of  comparative  ad- 
vantage is  most  likely  to  appear  in  the  United  States  in  two  classes 
of  industries, — those  that  turn  out  large  quantities  of  staple  homo- 
geneous commodities  and  those  that  themselves  make  tools  and 
machinery.  Only  where  many  identical  things  are  turned  out,  does 
it  pay  to  construct  an  elaborate  and  expensive  plant.  A  machine- 
using  people  directs  its  energies  to  best  advantage  where  thousands 
of  goods  of  the  same  pattern  are  to  be  produced.  Hence  the  re- 
peated experience  that,  notwithstanding  high  duties,  there  is  a 
tendency  to  import  specialties  and  goods  salable  in  small  quantities 
only.  Goods  used  by  the  masses  in  large  quantities,  as  distinguished 
from  luxuries  bought  by  the  comparatively  few  who  are  rich,  are 
likely  to  be  produced  at  home,  without  danger  of  being  pushed  by 
competing  imports.  If  specialties,  such  as  goods  made  to  order, 
must  be  supplied  by  domestic  producers,  they  are  likely  to  be  what 


COMPARATIVE  ADVANTAGE  135 

the  customer  thinks  inordinately  dear ;  because  they  are  made  pre- 
ponderantly, or  at  least  in  greater  degree,  by  hand  labor  which  is 
paid  high  wages  and  which  by  the  very  conditions  of  the  case  cannot 
use  labor-saving  machinery.  Again,  implements  themselves,  big  and 
little,  are  likely  to  be  well  made  in  a  country  where  people  are 
constantly  turning  to  machinery ;  from  kitchen  utensils  and  house- 
hold hardware  to  machine  tools,  electric  apparatus,  and  huge  print- 
ing presses.  These  are  things  in  which  the  success  of  American 
industry  is  familiar ;  which  are  exported,  not  imported ;  in  which  it 
is  proverbial  that  the  Yankee  has  a  peculiar  knack, — another  way 
of  saying  that  he  has  a  comparative  advantage. 

The  relation  between  high  wages  and  the  use  of  machinery  calls 
for  a  word  more  of  explanation.  It  is  usually  said  that  high  wages 
are  a  cause  of  the  adoption  of  machinery,  and  that  we  find  here  the 
explanation  of  the  greater  use  of  machinery  in  the  United  States. 
I  believe  that  the  relation  is  the  reverse ;  high  wagp^^  are  the  pffert, 
not  ^hP  ^^"gp*  To  the  individual  manufacturer  it  may  seem  a  cause ; 
he  schemes  to  save  in  the  wages  bill  by  adopting  a  labor-saving 
device.  But  the  reason  why  he  is  induced  to  scheme  is  that  labor- 
saving  devices  are  in  common  use  and  that  the  effectiveness  of  in- 
dustry at  large  is  therefore  great, — hence  high  wages.  No  doubt  the 
general  situation  has  its  reflex  influence  on  the  individual.  Every 
one  is  put  to  his  trumps ;  every  one  feels  the  need  of  playing  the 
industrial  game  at  its  best.  The  abundant  resources  which  so  long 
contributed  greatly,  and  indeed  still  contribute,  to  making  labor 
productive  and  wages  high,  thereby  stimulated  the  introduction  of 
labor-saving  methods  in  industries  not  so  directly  affected  by  the 
favor  of  nature.  But  the  fundamental  cause  of  the  prevalent  use  of 
machinery  was  in  the  intelligence  and  inventiveness  of  the  people ; 
these  being  promoted  again  by  the  breath  of  freedom  and  compe- 
tition in  all  their  affairs.  What  are  the  ultimate  causes  of  industrial 
progress  and  industrial  effectiveness  is  not  easily  stated ;  complex 
historical,  political,  perhaps  ethnographic  forces  must  be  reckoned 
with.  But  these  causes  work  out  their  results  in  modern  times 
largely  by  prompting  men  to  improve  their  implements  and  to  use 
unhesitatingly  new  and  better  implements.  Thence  flows  a  high 
rate  of  return  for  their  labor ;  it  is  not  the  high  rate  of  return  that 
leads  them  to  use  the  better  tools. 


136  TAUSSIG 

In  creating  and  maintaining  the  comparative  advantage  which 
comes  from  the  better  application  of  the  machine  processes,  the 
business  man — the  industrial  leader — has  become  in  recent  times 
a  more  and  more  important  factor.  The  efficiency  of  the  individual 
workman  has  been  much  dwelt  on  in  discussion  of  the  rivalries  of 
different  countries :  aptitude,  skill,  intelligence,  alertness,  perhaps 
inherited  traits.  No  doubt  qualities  of  this  sort  have  counted  in  the 
international  trade  of  the  United  States,  and  still  count.  The  Ameri- 
can mechanic  is  a  handy  fellow, — it  is  from  his  ranks  that  the 
inventors  and  business  leaders  have  been  largely  recruited, — and  he 
can  run  a  machine  so  as  to  make  it  work  at  its  best.  But  there  is  a 
steady  tendency  to  make  machinery  automatic,  and  largely  inde- 
pendent of  the  skill  of  the  operative  who  runs  it.  The  mechanics 
who  construct  the  machines  and  keep  them  in  repair  must  indeed  be 
highly  skilled.  Once,  however,  the  elaborate  machine  is  constructed 
and  kept  in  perfect  running  order,  the  operative  simply  needs  to  be 
assiduous.  Under  such  circumstances  the  essential  basis  of  a  com- 
parative advantage  in  the  machine-using  industries  is  found  in 
management, —  in  invention,  rapid  adoption  of  the  best  devices, 
organization. 

The  business  leader  has  been  throughout  a  person  of  greater 
consequence  in  the  United  States  than  elsewhere.  He  has  loomed 
up  large  in  social  consequence  because  he  has  been  of  the  first 
economic  consequence.  He  has  constructed  the  railway,  and  opened 
up  the  country ;  he  has  contributed  immensely  to  the  utilization  of 
the  great  agricultural  resources ;  he  has  led  and  guided  the  inventor 
and  mechanic.  I  am  far  from  being  disposed  to  sing  his  praises; 
there  are  sins  enough  to  be  laid  to  his  account.  But  he  has  played 
an  enormously  effective  part  in  giving  American  industry  its  special 
characteristics.  His  part  is  no  less  decisive  now  than  it  was  in 
former  times, — nay,  more  so.  The  labor  conditions  brought  about 
by  the  enormous  immigration  of  recent  decades  have  put  at  his 
disposal  a  vast  supply  of  docile,  assiduous,  untrained  workmen.  He 
has  adapted  his  methods  of  production  to  the  new  situation.  His 
own  energy,  and  the  ingenuity  and  attention  of  his  engineers  and 
inventors  and  mechanics,  have  been  directed  to  devising  machinery 
that  will  almost  run  itself.  Here  the  newly-arrived  immigrant  can  be 
used.    So  far  as  the  American  can  do  this  sort  of  machinery  making 


COMPARATIVE  ADVANTAGE  137 

to  peculiar  advantage,  so  far  can  he  pay  wages  to  the  immigrants 
on  the  higher  American  scale  and  yet  hold  his  own  against  the 
European  competitor  who  pays  lower  wages  to  the  immigrant's 
stay-at-home  fellow.  But  it  is  on  this  condition  only  that  he  can 
afford  to  pay  the  green  hand  wages  on  the  American  scale,  or  on 
some  approach  to  it:  he  must  make  the  total  labor  more  effective. 
The  main  cause  of  greater  effectiveness  in  the  dominating  industries 
is  to  be  found,  under  the  economic  conditions  of  recent  times,  not  so 
much  in  the  industrial  quality  of  the  rank  and  file  as  in  that  of  the 
technical  and  business  leaders. 

Similar  reasoning  is  applicable  to  another  cause  of  effectiveness 
in  industry  which  has  been  much  discussed  of  late, — "scientific 
management."  Some  persons  believe  that  here  is  a  panacea  of 
universal  application ;  any  and  every  industry  can  be  made  more 
effective  by  systematic  observation  and  experiment  on  each  of  its 
steps  and  management  based  thereon.  With  reference  to  the  protec- 
tive system  it  was  maintained,  for  example,  after  the  reduction  of 
duties  in  the  tariff  act  of  19 13,  that  scientific  management,  if  gen- 
erally adopted,  would  enable  all  American  industries  to  meet  the 
new  and  sharp  competition  of  foreigners.  The  truth  is  that  here 
also  the  question  is  one  of  comparative  advantage.  Scientific  man- 
agement is  likely  to  tell  more  in  some  industries  than  in  others. 
Apparently  it  tells  most  in  industries  of  the  standardized  type, — 
precisely  those  in  which  industrial  leadership  already  has  proved  of 
cardinal  importance  and  in  which  Americans  have  already  shown  the 
greatest  aptitude  for  leadership.  It  implies  large-scale  operation ; 
since  the  heavy  expense  of  preliminary  investigation  and  the  en- 
larged supervisory  staff  are  worth  while  only  if  the  expense  is  spread 
over  a  large  output.  It  is  adapted  not  to  industries  which  produce 
specialties  or  small  lots  of  numerous  and  varied  articles,  but  to  those 
in  which  the  steady  repetition  of  the  same  operations  makes  it  profit- 
able to  work  out  an  elaborate  system.  The  indications  are  that  it 
will  not  radically  change  the  character  of  American  manufacturing 
industry  or  modify  the  division  between  domestic  and  foreign  sources 
of  supply.  Rather  is  it  likely  to  accentuate  existing  relations ;  to 
strengthen  American  industry  where  it  is  already  strong.  Not  all 
industries  equally  will  feel  its  influence,  but  those  in  which  this 
special  form  of  industrial  leadership  tells  with  special  effectiveness. 


138  TAUSSIG 

Returning  now  to  the  invention  and  operation  of  machinery,  we 
have  to  consider  a  further  possibility, —  one  which  has  played  a 
considerable  part  in  recent  tariff  discussions.  The  more  machinery 
becomes  automatic,  the  more  readily  can  it  be  transplanted.  Is 
there  not  a  likelihood  that  apparatus  which  is  almost  self-acting 
will  be  carried  off  to  countries  of  low  wages,  and  there  used  for  pro- 
ducing articles  at  lower  price  than  is  possible  in  the  country  of  high 
wages  where  the  apparatus  has  originated  ?  In  hearings  before  our 
congressional  committees  a  fear  is  often  expressed  that  American 
inventors  and  tool-makers  will  find  themselves  in  such  a  plight.  An 
American  firm,  it  is  said,  will  devise  a  new  machine,  and  an  export 
of  the  machine  itself  or  of  its  products  will  set  in.  Then  some  Ger- 
man will  buy  a  specimen  and  reproduce  the  machine  in  his  own 
country  (the  Germans  have  been  usually  complained  of  as  the 
arch  plagiarists ;  very  recently,  the  Japanese  also  are  held  up  in 
terrorem).  Soon  not  only  will  the  exports  cease,  but  the  machine 
itself  will  be  operated  in  Germany  by  low-paid  labor,  and  the 
articles  made  by  its  aid  will  be  sent  back  to  the  United  States. 
Shoe  machinery  and  knitting  machinery  have  been  cited  in  illus- 
tration. The  identical  apparatus  which  has  been  brought  in  the 
United  States  to  extraordinary  perfection  is  sent  to  Europe  (per- 
haps even  made  in  Europe  by  the  American  manufacturer),  and 
is  there  worked  by  cheaper  labor.  The  automatic  looms,  again, 
which  have  so  strikingly  influenced  the  textile  industry  of 
the  United  States,  and  so  much  increased  its  effectiveness,  are 
making  their  way  to  Europe, — here  again  being  pushed  into  use 
by  the  American  loom  makers  themselves.  Is  it  not  to  be 
expected  that  they  will  be  operated  by  cheaper  English  and 
German  and  French  labor,  and  that  their  products  will  be 
shipped  back  to  the  United  States,  to  the  destruction  of  the 
very  American  industry  which  they  had  first  made  strong  and 
independent  ? 

This  possibility  is  subject  to  exaggeration.  It  is  not  so  easy  as 
might  be  supposed  to  transplant  an  improved  system  of  production 
and  all  that  hangs  thereby.  However  automatic  a  machine  may  be, 
intelligence  and  knack  in  operating  it  are  always  called  for ;  though 
less,  perhaps,  among  the  ordinary  hands  than  among  the  machine 
tenders  and  foremen.    It  is  a  common  experience  that  the  same 


COMPARATIVE  ADVANTAGE  139 

machinery  will  produce  in  the  country  of  its  invention  and  manu- 
facture better  results  than  when  transplanted.  Those  very  auto- 
matic looms,  just  referred  to,  are  making  their  way  very  slowly  into 
Europe.  They  do  not  fit  into  the  traditional  industrial  practices, 
and  do  not  accomplish  what  they  accomplish  in  the  United  States. 
The  difficulties  which  impede  the  transfer  of  machinery  and  methods, 
however  perfected  and  however  available  for  every  applicant,  are 
most  strikingly  illustrated  in  the  rivalry  of  the  Orient.  We  hear 
frequently  of  the  menace  of  the  cheap  labor  of  China,  India,  Japan. 
Will  not  these  countries  deluge  us  with  the  products  of  cheap  factory 
labor,  when  once  they  have  equipped  themselves  with  the  latest 
machinery  ?  The  truth  is  that  they  will  in  all  probability  never  thus 
equip  themselves.  To  do  so,  would  require  more  than  the  mere 
shipment  of  the  machinery  and  the  directions  for  working  it.  A 
completely  different  industrial  environment  would  need  to  be  trans- 
planted. The  yellow  peril  has  been  as  much  exaggerated  in  its 
economic  possibilities  as  in  its  military. 

None  the  less,  some  possibility  of  this  sort  does  exist,  especially 
in  the  rivalry  between  those  countries  of  advanced  civilization 
which  are  more  nearly  on  the  same  industrial  level.  It  is  by  no 
means  out  of  the  question  that  shoe  machinery  or  automatic  looms 
shall  be  worked  as  well  in  Germany  as  in  the  United  States.  Sup- 
posing this  to  be  done,  cannot  the  German  employer  who  gets  his 
operatives  at  low  wages  undersell  the  American  employer  who  must 
pay  high  wages?  Is  not  the  comparative  advantage  which  the 
United  States  possesses  in  its  ingenious  machinery  necessarily  an 
elusive  one,  sure  to  slip  away  in  time?  An  advantage  may  indeed 
be  retained  indefinitely  where  skill  or  intelligence  on  the  part  of 
the  individual  workmen  are  necessary.  Even  here  there  is  a  doubt 
whether  it  will  persist,  in  view  of  the  spread  of  education  and  tech- 
nical training  the  world  over.  At  all  events,  in  the  widening  range 
of  industries  where  the  workman  merely  tends  semi-automatic  ma- 
chinery, the  manufacturing  industries  of  the  country  having  high 
wages  would  seem  to  be  in  a  perilous  situation. 

The  only  answer  which  can  be  given  to  questioning  of  this  sort 
is  that  the  leading  country  must  retain  its  lead.  As  fast  a-s  other 
countries  adopt  the  known  and  tried  improvements,  it  must  intro- 
duce new  improvements.  Unrelaxed  progress  is  essential  to  sustained 


140  TAUSSIG 

superiority  ;  he  who  stands  still  inevitably  loses  first  place.  Such  was 
in  the  main  the  relation  between  England  and  the  other  western 
countries  during  the  first  three-quarters  of  the  nineteenth  century. 
English  machinery  was  exported  and  English  methods  were  copied 
throughout  the  world,  but  the  lead  of  the  British  was  none  the  less 
maintained.  As  fast  as  the  other  countries  adopted  the  devices 
which  originated  in  England,  that  country  advanced  with  new 
inventions  or  with  goods  of  new  grades.  A  similar  relation  seems 
to  exist  at  the  present  time  between  Germany  and  the  other  coun- 
tries which  follow  her  lead  in  some  of  the  chemical  industries.  It 
appears  also  in  the  position  of  the  United  States  in  those  manufac- 
turing industries  which  contribute  to  our  exports.  As  fast  as  the 
American  devices  are  copied  elsewhere,  still  other  improvements 
must  be  introduced. 

This  will  seem  to  the  American  manufacturer  a  harsh  sentence, 
and  a  heartless  or  unpatriotic  one  to  the  ordinary  protectionist. 
What?  To  be  deprived  of  the  fruits  of  our  own  enterprise  and 
ingenuity,  without  protection  from  a  paternal  government  against 
the  interlopers  ?  Yet  I  see  no  other  answer  consistent  with  the 
general  reasoning  of  economics  on  international  trade  and  the 
geographical  division  of  labor.  The  gain  which  a  country  secures 
from  its  labor  is  largest  when  that  labor  is  applied  in  the  most 
effective  way ;  and  labor  is  applied  with  the  greatest  effectiveness 
only  when  it  proves  this  effectiveness  by  sustained  ability  to  hold  the 
field  constantly  against  all  rivals. 

This  train  of  reasoning,  however,  can  be  carried  further.  It  is 
conceivable  that  improvements  and  inventions  will  be  so  com- 
pletely adopted  by  all  the  advanced  countries  as  to  bring  about 
an  equalization  in  their  industrial  conditions ;  which  of  necessity 
would  lessen  the  volume  and  the  importance  of  trade  between  them. 
Where  an  invention  is  introduced  in  a  single  country,  it  gives  that 
country  at  the  outset  a  comparative  advantage,  leads  to  exports, 
and  swells  the  volume  of  international  trade.  When  the  invention 
comes  into  international  use,  however,  the  industry  which  it  serves 
may  drift  toward  the  countries  of  low  wages ;  and  these  then  may 
export  the  products.  May  export  them,  be  it  observed ;  for  this 
tendency  is  greatly  checked  by  those  obstacles  to  imitation  and 
transplanting  which  have  just  been  referred  to.    But  suppose  the 


COMPARATIVE  ADVANTAGE  141 

tendency  not  to  be  checked  :  suppose  that  each  and  every  new  device 
comes  to  be  adopted  in  all  countries,  and  used  in  all  with  equal 
effectiveness.  Then  the  ultimate  consequences  will  be  different  from 
those  that  nowadays  follow  the  introduction  of  improvements.  No 
one  country  will  then  possess  advantages  in  manufactures  over 
others ;  no  one  will  be  able  to  export  to  another ;  trade  between 
them  in  manufactured  goods, — if  the  assumed  conditions  hold  abso- 
lutely,— will  cease.  All  countries  will  secure  in  the  same  degree  the 
benefit  of  the  universalized  inventions. 

Such  would  be  the  inevitable  outcome  of  complete  equalization 
of  the  effectiveness  of  labor.  The  total  income  of  a  community  is 
the  product  of  its  industry, — in  the  last  analysis,  of  its  labor.  If 
labor  is  equally  productive  everywhere,  differences  in  prosperity 
will  cease.  Then  there  will  be  no  room  for  comparative  advantages 
based  on  invention,  peculiar  effectiveness,  better  machinery,  more 
skilful  organization.  The  only  trade  between  countries  will  be  that 
based  on  unalterable  climatic  or  physical  advantages ;  such  trade, 
for  instance,  as  arises  between  tropical  and  temperate  regions 
and  between  temperate  regions  having  markedly  different  natural 
resources. 

This  consummation  will  not  be  reached  for  an  indefinite  period ; 
nay,  probably  it  will  never  be  reached.  Certainly  it  is  beyond  the 
range  of  possibility  in  any  future  which  we  can  now  foresee.  But 
some  approach  to  it  is  likely  to  come  in  the  relations  between  the 
more  advanced  countries.  There  is  a  tendency  toward  equalization 
in  their  use  of  machinery,  and  so  in  their  general  industrial  condi- 
tions. For  the  United  States  especially,  the  twentieth  century  will 
be  different  from  the  nineteenth.  The  period  of  free  land  has 
been  virtually  passed.  That  great  basis  of  high  material  prosperity 
and  of  high  general  wages  no  longer  exists  as  broadly  and  strongly 
as  it  did  during  the  first  century  of  our  national  life.  The  continued 
maintenance  of  a  prosperity  greater  than  that  of  England  and 
Germany  and  France  must  rest  on  other  causes.  Now  that  fresh 
land  can  no  longer  be  resorted  to  by  the  expanding  population,  a 
higher  effectiveness  of  labor  must  depend  almost  exclusively  on 
better  implements  and  higher  skill, — on  labor  better  led  and  better 
applied.  It  may  be  reasonably  hoped  that  the  United  States  will 
long  remain  the  land  of  promise,  in  the  van  of  material  progress ; 


142  TAUSSIG 

but  the  degree  of  difference  may  be  less  than  it  was.  This  lessen- 
ing difference  will  come  about,  probably,  not  because  the  United 
States  will  fall  back  but  because  other  countries  will  gain  on  her. 
Such  has  been  the  nature  of  the  changed  relation  between  England 
and  the  countries  of  the  Continent  during  the  last  generation ;  and 
such, —  to  go  back  earlier, — was  the  change  in  the  relative  positions 
of  Holland  and  England  in  the  course  of  the  seventeenth  and  eight- 
eenth centuries.  England  no  longer  retains  the  unmistakable  lead- 
ership which  she  had  over  the  Continent  during  the  greater  part  of 
the  nineteenth  century.  But  she  has  not  retrograded ;  the  countries 
of  the  Continent  have  progressed.  Such  is  likely  to  be  the  nature 
of  the  coming  race  between  the  United  States  and  other  advanced 
countries.  And  the  outcome  is  one  which  every  friend  of  humanity 
must  welcome.  It  means  diffused  prosperity,  economic  and  social 
progress. 

For  an  indefinite  time,  however,  differences  in  general  industrial 
effectiveness  will  remain.  They  will  obviously  remain,  so  far  as  they 
rest  upon  natural  causes, — differences  in  soil,  in  mineral  wealth,  in 
climate.  They  will  remain  also  in  many  manufacturing  industries  in 
which  physical  causes  are  not  decisive.  Some  countries, — the  United 
States  among  them,  we  may  hope  and  expect, — will  use  machinery 
better,  will  apply  labor-saving  appliances  more  freely.  The  people 
of  the  United  States  will  direct  their  labor  with  greatest  advantage 
to  those  industries  in  which  their  abilities  tell  to  the  utmost.  The 
development  of  the  different  industries  will  unquestionably  continue 
to  be  affected  by  the  accidents  of  invention  and  of  progress,  by  domi- 
nant personalities  in  this  country  and  in  that,  by  the  historical 
development  of  aptitudes  and  tastes,  by  some  causes  of  variations 
in  industrial  leadership  that  seem  inscrutable.  But  a  general  trend 
is  likely  to  persist ;  in  the  United  States  labor-saving  devices  will  be 
adopted  more  quickly  and  more  widely.  ...  In  the  industries  where 
machinery  can  be  used  to  most  effect,  this  country  will  continue  to 
have  a  comparative  advantage. 


V 

CAIRNES:  INTERNATIONAL  VALUES^ 

*********** 

THE  transactions  of  international  trade  are  of  course  carried 
on  through  the  medium  of  money — that  is  to  say,  of  gold  and 
silver ;  and  Ricardo  has  shown  that  the  effect  of  the  play  of  inter- 
national demand  is  to  produce  such  a  distribution  of  the  precious 
metals,  and  such  a  relative  scale  of  prices  in  commercial  countries, 
as  on  the  whole  to  cause  the  trade  of  each  country  with  all  others 
to  be  carried  on  upon  the  same  terms  as  it  would  be  if  conducted  by 
barter.  When  this  state  of  things  is  realized,  the  precious  metals 
(so  far  as  they  are  employed  as  a  medium  of  exchange,  and  not  as 
a  staple  of  commerce)  cease  to  pass  from  country  to  country ;  and 
international  trade  is  in  a  condition  of  equilibrium.'-  The  point  I 
desire  now  to  call  attention  to  is  the  condition  of  international 
demand  which  issues  in  this  result. 

The  solution  commonly  given  of  this  problem  is  that  commercial 
equilibrium  is  attained  when  the  value  of  the  imports  into  a  country, 
measured  in  gold  or  silver,  the  universal  money  of  commerce,  is 
equal  to  the  value  of  the  exports  from  that  country.  In  the  language 
of  Mr.  Mill,  "the  produce  of  a  country  exchanges  for  the  produce 
of  other  countries  at  such  values  as  are  required  in  order  that  the 
whole  of  her  exports  may  exactly  pay  for  the  whole  of  her  imports." 

ijohn  Elliot  Cairnes,  Some  Principles  of  Political  Economy  (1874),  Part  III, 
chap.  ill. 

-  The  equilibrium  of  commerce  may,  accordingly,  be  defined  for  all  countries, 
not  being  themselves  producers  of  the  precious  metals,  as  that  state  of  trade 
which  results  in  maintaining  the  real  exchanges,  one  year  with  another,  at  par. 
Where  it  happens,  however,  that  a  country  produces  gold  or  silver  for  export, 
a  premium  on  the  exchange  is,  in  this  case,  the  normal  state  of  things.  During 
the  last  twenty  years  the  commercial  equiUbrium  has  been  extensively  disturbed 
in  most  countries — the  necessary  consequence  of  the  large  additions  now  being 
made  to  our  stock  of  money. 

143 


144  CAIRNES 

Now,  as  a  matter  of  fact,  it  very  rarely  happens  that  the  whole 
exports  of  a  country,  even  if  we  take  an  average  of  many  years, 
exactly  pay  for  the  whole  of  its  imports ;  nor  can  it  be  truly  said 
that  there  is  any  tendency  in  the  dealings  of  nations  toward  this 
result.  The  evidence  of  this  is  to  be  found  in  any  statistical  table 
showing  the  exports  and  imports  of  different  countries.  An  examina- 
tion of  such  a  table  will  show  that  there  are  countries  which  con- 
stantly, and  as  a  normal  state  of  things,  import  largely  in  excess  of 
their  exportations,  while  there  are  others  of  which  the  exports  as 
regularly  exceed  the  imports.  In  other  cases,  again,  the  imports 
will  be  found  for  a  time  to  have  exceeded  the  exports,  after  which 
the  relation  is  inverted,  and  the  exports  begin  to  outstrip  the  imports. 
With  such  facts  before  us  we  can  not  easily  admit  that  an  equalization 
of  imports  and  exports  is  the  necessary  condition  of  a  staple  trade ; 
and  this  being  so,  we  have  to  consider  what  that  condition  is. 

To  elucidate  this,  a  better  example  can  not  be  found  than  the 
external  trade  of  the  United  Kingdom.  I  take  it  as  set  forth  in  the 
Statistical  Abstract  for  the  years  between  1856  and  1870  inclusive. 
During  the  whole  of  this  time  the  imports  remained  constantly  and 
largely  in  excess  of  the  exports.  At  the  commencement  of  the  period 
the  exports  stood  at,  in  round  numbers,  £115,000,000,  the  imports 
at  £172,000,000;  the  imports  thus  exceeding  the  exports  by  the 
amount  of  £57,000,000  sterling.  At  the  end,  that  is  to  say  in  the 
year  1870,  the  exports  were  £199,000,000,  while  the  imports  reached 
£303,000,000,  showing  a  difference  in  favor  of  imports  of  £104,- 
000,000 ;  and  the  returns  of  the  intervening  years  exhibit  a  constant 
predominance  on  the  same  side,  and  nearly  in  the  same  proportion. 
The  question  arises.  How  has  this  large  excess  of  imports  been  paid 
for?  The  answer  is,  to  a  small  extent  it  has  been  paid  for  in 
services,  principally  in  the  services  of  our  mercantile  marine,  per- 
forming as  it  does  a  large  proportion  of  the  carrying  trade  of  the 
world,  but,  in  the  main,  it  has  not  been  paid  for  at  all.  It  came  to 
us  from  foreign  nations,  as  all  our  imports  have  come,  in  the  ordinary 
course  of  trade,  but  the  proceeds  on  sale  have  never  been  returned 
in  any  form  to  those  from  whom  the  goods  came :  they  were  applied 
instead  to  the  discharge  of  debts  owing  to  us — debts,  however,  in- 
curred on  account  of  transactions  wholly  apart  from  our  export 
trade.    In  point  of  fact,  what  has  happened  has  been  this :   Great 


INTERNATIONAL  VALUES  14S 

Britain  has  for  a  long  time  occupied  the  position  of  a  lender  of 
capital  to  other  nations ;  she  has  invested  her  capital  freely  in  her 
own  colonies ;  she  has  lent  money  to  many  countries  for  industrial 
undertakings,  and  has  been  a  large  purchaser  of  foreign  stocks.  On 
all  these  accounts  foreign  nations,  including  under  this  term  our 
own  colonies,  have  become  her  debtors,  and,  in  discharge  of  their 
obligations  accruing  in  the  form  of  profits,  interest,  and  dividends 
on  stock,  are  compelled  to  send  her,  year  by  year,  value  to  a  large 
extent  for  which  no  payment  in  return  is  required.  Here  we  find 
the  explanation  of  the  large  normal  excess  of  our  imports  over  our 
exports.  But  an  examination  of  the  facts  will  further  evince  that 
this  excess  is,  in  the  case  of  Great  Britain,  the  indispensable  condi- 
tion of  commercial  equilibrium ;  that  under  any  other  circumstances 
the  present  relation  of  prices  between  her  and  foreign  countries,  or, 
what  amounts  to  the  same  thing,  the  present  proportion  in  which 
they  exchange  their  products,  could  not  be  maintained.  This  will 
be  evident  if  we  consider  what  would  be  the  consequence  of  an 
equality  of  value  being  established  between  British  imports  and 
exports,  the  financial  relations  of  the  country  with  the  rest  of  the 
world  being  such  as  they  are.  Foreign  nations  would  have  to  pay 
us,  as  now,  for  what  we  export,  and  for  this,  bills  drawn  against  the 
goods  they  send  us,  that  is,  our  imports,  would  exactly  suffice. 
But  they  owe  us  besides,  say  a  hundred  millions,  on  account  of 
dividends,  interest,  and  other  obligations.  How  are  they  to  dis- 
charge this  latter  liability?  It  is  evident  they  could  do  so  only 
in  one  way,  namely,  by  sending  us  gold  to  the  value  of  the  amount 
in  question.  An  extensive  influx  of  gold  from  foreign  countries  to 
Great  Britain  would  thus  set  in,  and — so  long  as  the  state  of  inter- 
national prices,  and  therefore  of  international  demand,  remained  at 
the  point  which  had  produced  the  equality  of  imports  and  exports 
— would  continue.  It  is  plain,  however,  that  international  prices 
and  demand  could  not  long  remain  steady  under  the  circumstances 
supposed.  The  large  and  continued  influx  of  gold  into  England 
would  necessarily  be  attended  by  a  rise  of  prices  here,  and  a  fall  in 
foreign  countries ;  and  this  would  quickly  lead  to  a  change  in  the 
demand  of  England  and  of  foreign  countries  for  their  respective 
products.  England,  in  possession  of  enlarged  monetary  resources, 
and  finding  prices  falling  abroad,  would  extend  her  demand  for 


146  CAIRNES 

foreign  commodities ;  while,  for  precisely  opposite  reasons,  foreign 
countries  would  curtail  their  demand  for  the  commodities  of  England. 
English  imports  would  thus  increase,  and  English  exports  diminish ; 
and  this  would  go  on,  year  by  year,  so  long  as  gold  continued  to 
flow.  But  the  question  arises  at  what  point  would  the  process 
terminate,  and  trade  find  its  equilibrium  ?  The  answer  is :  precisely 
when  the  excess  of  imports  over  exports  had  attained  its  present 
dimensions — when  the  former,  that  is  to  say,  had  exceeded  the 
latter  by  a  hundred  millions  sterling ;  for  it  would  only  be  then 
that  foreign  countries  could  discharge  all  their  liabilities  to  us  with- 
out remitting  gold.  Gold  would,  therefore,  at  this  point  cease  to 
flow,  and  prices  would  remain  at  the  level  they  had  reached.  In  a 
word,  the  trade  between  England  and  the  world  would  once  more 
have  attained  equilibrium. 

And  now  we  are  enabled  to  answer  the  question  propounded  a 
few  pages  back.  The  answer  may  be  formulated  thus :  The  state 
of  international  demand  which  results  in  commercial  equilibrium 
is  realised  when  the  reciprocal  demand  of  trading  countries  produces 
such  a  relation  of  imports  and  exports  among  them  as  enables  each 
country  by  means  of  her  exports  to  discharge  all  her  foreign  lia- 
bilities— a  position  from  which  the  following  corollary  may  be 
deduced,  that  all  payments,  due  from  one  country  to  another  or  to 
other  countries  on  other  accounts  than  that  of  imports,  of  a  per- 
manent character — for  example,  an  annual  tribute,  interest  on 
borrowed  capital,  dividends  on  stock,  and  so  forth — and  in  excess 
of  similar  payments  due  from  these  latter  to  the  former,  will  be 
represented  in  the  foreign  trade  of  that  country  by  an  excess  of 
exports  over  imports ;  while,  conversely,  an  excess  of  payments  of 
this  character  to  be  received  over  payments  due  will  find  its  com- 
mercial expression  in  an  excess  of  imports  over  exports.  This  is,  in 
truth,  merely  to  say  that  the  foreign  trade  of  each  country  will 
adapt  itself  to  the  pecuniary  requirements  of  that  country  in  rela- 
tion to  the  countries  with  which  it  trades.  If  a  country  has  been  a 
large  borrower  of  foreign  capital,  and  so  is  indebted  to  foreign  na- 
tions in  annual  interest,  or  if,  again,  her  people  are  much  given  to 
traveling  in  foreign  countries,  and  so  have  occasion  to  remit  annually 
large  sums  abroad  for  which  no  return  is  required,  under  such 
circumstances  her  exports  will  tend  to  exceed  her  imports ;  while, 


INTERNATIONAL  VALUES  147 

under  an  opposite  state  of  things,  that  is  to  say,  if  a  country  has  been 
a  large  foreign  lender,  or  if  it  be  the  scene  of  travel  for  the  inhabit- 
ants of  other  countries — the  imports  will  tend  to  exceed  the  exports. 
With  many,  indeed  with  most  countries,  it  will  happen  that  they  are 
debtors  to  foreign  countries  upon  one  score  and  creditors  upon 
another ;  and  the  state  of  the  import  and  export  trade  will  be  such 
as  the  state  of  the  balance  in  each  case  may  prescribe.  For  example, 
Great  Britain  makes  large  remittances  abroad  every  year  to  meet 
the  expenses  of  Englishmen  residing  or  traveling  in  foreign  countries. 
This  would  tend  to  make  her  exports  exceed  her  imports,  and  would 
actually  produce  this  effect,  if  it  were  not  that  the  debts  due  on  this 
account  to  foreign  nations  are  more  than  balanced  by  larger  debts  due 
on  other  accounts  by  them  to  us.  The  balance  of  such  non-commercial 
payments  being,  on  the  whole,  largely  in  favor  of  Great  Britain, 
it  results,  as  we  have  seen,  that  her  imports  are,  as  a  rule,  largely 
in  excess  of  her  exports.  An  illustration  of  the  same  principle  in 
an  opposite  sense  is  afforded  by  the  foreign  trade  of  the  United 
States  previous  to  i860.  As  all  the  world  knows,  the  people  of  the 
United  States  had  long  been,  as  they  are  still,  much  addicted  to 
foreign  travel :  they  had  also  for  a  long  time  been  extensive  bor- 
rowers in  European  money  markets.  Both  these  practices  combined 
to  place  them  under  the  necessity  of  remitting  annually  large  sums 
to  Europe  over  and  above  what  they  owed  on  commercial  account ; 
and  this  obligation  was  discharged  in  the  only  way,  in  the  long  run, 
possible,  namely,  through  the  medium  of  United  States  products 
exported.  Accordingly,  if  we  turn  to  the  Reports  on  the  external 
trade  of  the  United  States  for  the  period  previous  to  i860,  we  find, 
as  the  normal  state  of  things  in  that  trade,  a  pretty  steady  excess 
of  exports  over  imports — an  excess  which  in  her  dealings  with 
Europe  assumes  very  large  proportions. 

§  6.  The  foregoing  examples  show  the  effects  of  international 
lending  and  borrowing  on  the  external  trade  of  nations  ajter  these 
practices  have  issued  in  monetary  relations  of  a  definitive  kind.  At 
the  commencement,  however,  and  for  so  long  as  the  process  of 
incurring  debt  is  still  in  actual  operation,  the  effect  of  such  practices 
on  the  foreign  trade  of  a  country  is  exactly  the  reverse  of  that  which 
is  subsequently  realized.    The  nations  which  have  engaged  to  lend 


148  CAIRNES 

are,  during  this  period,  those  which  have  pecuniary  obligations  to 
discharge ;  the  nations  which  borrow,  those  which  are  entitled  to 
receive  payments  in  excess  of  what  is  due  to  them  on  their  ordinary 
trade ;  and  for  a  time  the  external  trade  of  both  tends  to  adapt 
itself  to  this  state  of  things.  The  subject  is  perhaps  of  sufficient 
importance  to  deserve  some  detailed  illustration. 

Let  us,  then,  suppose  an  industrial  colony,  starting  on  its  career, 
to  become  a  borrower  of  capital  from  its  mother-country ;  and,  for 
simplicity  of  illustration,  we  will  assume  that  neither  is  a  producer 
of  the  precious  metals,  which,  therefore,  would  only  pass  between 
them  in  discharge  of  pecuniary  debts.  The  amount  which  the  mother- 
country  undertakes  to  lend,  and  the  colony  to  receive,  we  will  set 
down  at  one  million  sterling  annually.  This  being  the  position  of 
affairs,  it  becomes  necessary  that  the  sum  to  be  lent  should  be 
remitted  each  year  from  the  mother-country  to  the  colony,  and  this, 
it  is  manifest,  can  only  be  done,  either  by  a  remittance  of  gold  to 
the  amount  required,  or  by  an  exportation,  in  addition  to  that 
ordinarily  taking  place,  of  commodities  to  the  same  value,  or  by  a 
combination  of  both  these  methods.  If  the  colony  is  content  to 
take  the  entire  amount,  or  any  portion  of  it,  in  commodities,  this 
would  imply  a  corresponding  increase  in  colonial  imports  over 
colonial  exports ;  for  it  would  only  be  in  the  event  of  the  increased 
importation  being  unbalanced  by  exports  from  the  colony  to  the 
mother-country  that  the  proceeds  arising  from  it  would  be  available 
for  the  mother-country  in  discharge  of  the  loan,  and  there  would 
obviously  be  nothing  in  what  had  occurred  to  lead  the  latter  to 
increase  her  demand  for  colonial  products.  But  it  is  probable  that 
at  least  a  portion  of  the  loan  would  be  sent  in  gold ;  and  this  would 
operate  indirectly  toward  the  same  result.  For  the  flow  of  gold  into 
the  colony  year  by  year  would  necessarily  raise  colonial  prices, 
while  it  would  tend  in  the  opposite  direction  in  the  mother-country ; 
and  this,  through  a  play  of  forces  I  have  already  more  than  once 
described,  would  be  followed  by  an  increase  of  colonial  importations, 
and  a  corresponding  decline  in  the  exportation  of  colonial  products 
—  a  process  which  would  manifestly  continue,  until  at  length  the 
excess  of  commodities  sent  from  the  mother-country  to  the  colony 
over  those  received  from  thence  would  enable  the  former  to  pay  the 
whole  annual  loan  by  means  of  her  commodities  alone.    At  this  point 


INTERNATIONAL  VALUES  149 

the  trade  between  them  would  be  in  equilibrio ;  the  exportations 
from  the  mother-country  having  become  sufficient  to  enable  her  to 
discharge  by  this  means  all  her  liabilities  to  the  colony.  Up  to  this 
stage,  then,  the  effect  of  foreign  borrowing  on  the  colony  would,  so 
far  as  we  have  yet  traced  it,  tend  toward  an  excess  in  her  importa- 
tions from  the  mother-country  over  her  exportations  thither.  This 
would  be  the  initial  effect.^  But  during  the  continuance  of  the  proc- 
ess just  described,  the  grounds  of  an  opposite  state  of  things  would 
be  steadily  developed.  With  every  million  sterling  annually  remitted, 
the  colony  would  become  indebted  to  the  mother-country  for  the 
interest  on  the  amount.  Supposing  the  rate  of  interest  to  be  five 
per  cent,  per  annum,  at  the  end  of  the  first  year  the  debt  of  the 
colony  to  the  mother-country  would  be  £50,000 :  consequently,  in 
making  her  next  remittance  on  account  of  capital,  the  mother- 
country  would  only  need  to  send  value  to  the  amount,  whether  in 
commodities  or  gold,  of  £950,000.  In  the  following  year,  the  colony 
would  owe  on  account  of  interest  £100,000,  which,  still  supposing 
the  same  amount  of  capital  to  be  lent,  would  reduce  the  liabilities 
of  the  mother-country  on  this  score  to  £900,000,  and  this  process 
of  gradual  diminution  of  the  mother-country's  extra  commercial  lia- 
bilities to  the  colony  would,  at  the  end  of  twenty  years,  issue  in  this 
result,  that  the  sum  due  by  the  colony  on  account  of  interest  would 
equal  the  entire  amount  of  the  annual  loan.  What  would  be  the 
effect  on  the  external  trade  of  the  colony  of  this  growing  indebt- 
edness to  the  mother-country?  Manifestly  to  neutralize  that  pro- 
duced by  the  operation  of  the  influences  developed  in  the  early 
stages  of  these  transactions.  The  obligation  of  the  mother-country 
to  remit  value  to  the  colony,  in  addition  to  what  she  owed  on  account 
of  goods  imported  thence,  gave  an  impulse  to  her  export  trade,  and 
caused  the  importations  of  the  colony  to  exceed  her  exportations. 
The  obligation  of  the  colony  to  discharge  its  growing  liability  to 
the  mother-country  would  now,  year  by  year,  operate  to  reduce  the 
excess,  until  at  length  the  liabilities  incident  to  the  loans  on  each 
side  balancing  each  other,  the  equilibrium  of  trade  would  be  found 

1  If  the  reader  desires  to  verify  the  soundness  of  the  position  thus  far,  he  has 
only  to  turn  to  the  statistics  of  the  external  trade  of  some  of  the  leading  colonies 
of  Great  Britain,  in  which  the  imports  will  be  found  steadily  and  systematically 
to  exceed  the  exports. 


150  CAIRNES 

in  such  a  relation  of  exports  and  imports  as  would  balance  their 
remaining  obligations — on  the  supposition  that  these  latter  should 
consist  exclusively  of  commercial  debts,  then  in  an  equality  of  im- 
ports and  exports.  This  state  of  things,  however,  would  be  but 
momentary. 

We  have  supposed  the  colony  to  have  continued  borrowing  at 
the  rate  of  £1,000,000  sterling  annually  for  twenty  years.  At  this 
stage,  let  us  make  the  supposition  that  she  suddenly  ceases  to  bor- 
row, and  observe  what,  on  this  hypothesis,  would  be  her  financial 
position  in  relation  to  the  mother-country.  In  the  first  place,  she 
would  be  bound  to  pay  £1,000,000  sterling  annually  on  account  of 
interest ;  but,  no  longer  receiving  the  proceeds  of  the  loan  as  for- 
merly, she  could  not  set  off  one  obligation  against  the  other.  It  would, 
therefore,  be  necessary  for  her  to  remit  value  to  the  amount  required 
— in  other  words,  her  position  relatively  to  the  mother-country  at 
this  stage  of  affairs  would  be  financially  identical  with  that  of  the 
mother-country  toward  her  at  the  outset,  with  this  difference,  that 
no  new  indebtedness  would  be  growing  up  on  the  side  of  the  mother- 
country  to  neutralize  the  permanent  obligations  incurred  by  the 
colony.  The  financial  conditions  of  the  case  being  thus  changed, 
the  external  commerce  of  the  two  countries  would  adapt  itself  to 
the  altered  state  of  their  reciprocal  liabilities.  Gold  would  once 
again  begin  to  flow,  but  the  tide  would  this  time  be  directed  from 
the  colony  to  the  mother-country,  and  it  would  be  followed  by  a 
series  of  effects  similar  in  character,  though  opposite  in  direction, 
to  what  we  have  already  traced.  Year  by  year  the  exports  from  the 
colony  to  the  mother-country  would  exceed  its  imports  thence,  until 
at  length  the  excess  became  sufficient  to  enable  the  former  to  dis- 
charge its  financial  liability  in  the  products  of  its  own  industry. 
The  efflux  of  gold  would  at  this  point  cease,  and  the  trade  between 
the  two  countries  would  be  in  equilibrio  once  more. 

We  may  make  yet  another  supposition.  The  colony,  instead  of 
suddenly  ceasing  to  borrow  at  the  end  of  the  twentieth  year,  might 
continue  her  borrowings  on  the  former  scale  of  £1,000,000  annually. 
On  this  supposition,  her  debt  to  the  mother-country,  on  account  of 
interest,  at  the  end  of  the  twenty-first  year  would  be  £1,050,000; 
but  £1,000,000  of  this  could  now  be  set  off  against  the  annual  loan. 
In  other  words,  the  net  balance  due  to  the  mother-country  would  be 


INTERNATIONAL  VALUES  151 

£50,000 ;  but,  on  the  supposition  that  the  borrowing  continued, 
this  balance  would  grow  year  by  year  in  arithmetical  proportion,  and 
would  act  upon  her  external  trade,  in  proportion  to  its  amount,  in 
the  manner  already  shown.  In  course  of  time  we  may  assume  that, 
as  wealth  increased  in  the  colony,  she  would  have  less  need  of 
foreign  capital,  and  would  borrow  less  or  not  at  all,  but  she  would 
still  be  liable  to  send  abroad  value  in  excess  of  her  commercial 
obligations  to  the  amount  of  the  interest  due  on  all  debts  previously 
incurred.  The  normal  state  of  the  external  trade  of  the  colony 
would,  therefore,  under  the  circumstances  supposed,  be  one  in  which 
her  exports  largely  exceeded  her  imports ;  and  such  it  would  continue 
to  be  until  either  the  original  debt  was  paid  off,  or  the  colony  her- 
self had  become  a  lender,  and  by  this  means  imposed  a  similar  trib- 
ute upon  other  countries. 

§  7.  Such  is  the  nature  of  the  influences,  immediate  and  remote, 
exerted  on  the  external  trade  of  countries  by  the  practice  of  foreign 
borrowing.  In  order  to  render  the  principle  clear,  it  was  necessary, 
in  the  first  place,  to  exhibit  its  operation  under  very  simple  condi- 
tions ;  and  I,  therefore,  had  recourse  to  a  hypothetical  case.  But 
so  much,  it  is  hoped,  having  now  been  accomplished,  it  may  be  well 
to  turn  from  our  imaginary  mother-country  and  colony  to  an  actual 
instance  of  international  lending  and  borrowing  on  a  vast  scale. 
During  the  last  thirteen  years  the  financial  transactions  of  the 
United  States  with  Europe  have  far  exceeded  all  former  examples  of 
the  same  kind,  and  the  effects  which  they  have  produced,  both  on 
her  external  trade  up  to  the  present  time,  and  still  more  on  her 
commercial  and  financial  position  with  reference  to  the  future,  have 
been  of  a  magnitude  correspondingly  great.  As  furnishing,  there- 
fore, a  striking  practical  illustration  of  the  principles  we  have  been 
considering,  and  in  particular  of  the  modes  in  which  international 
settlements  on  a  great  scale  are  effected,  it  will,  I  think,  be  profit- 
able to  consider  here  in  some  detail  the  character  and  scope  of 
those  transactions. 

It  has  been  already  seen  that  previous  to  i860  the  normal  condi- 
tion of  the  external  trade  of  the  United  States  was  one  in  which  the 
exports  steadily  exceeded  the  imports,  this  being  the  natural  com- 
mercial   outcome    from   the   state    of   her    financial    relations    with 


152  CAIRNES 

Europe.  But  the  advent  of  the  Civil  War  brought  with  it  a  series 
of  events,  each  of  potent  influence,  and  which  in  their  combination 
have  sufficed  to  shake  American  trade  to  its  centre,  and  to  render 
the  financial  position  of  the  Union  in  presence  of  Europe  unprece- 
dented and  critical  in  the  extreme.  Of  these  events  the  most  impor- 
tant were  (i),  the  enactment  of  the  Morrill  tariff  in  1861,  by  which 
the  United  States  passed  from  what  was  substantially  a  free  trade 
commercial  regime  to  one  of  high  protection ;  ( 2 ) ,  the  sudden  ces- 
sation of  cotton  cultivation,  and,  as  a  consequence  of  this  and  of 
the  Civil  War,  the  temporary  collapse  of  the  cotton  trade  with 
Europe;  (3),  the  creation  of  an  enormous  national  debt,  simul- 
taneously with  considerable  additions  made  to  State  and  other  debts 
previously  contracted,  a  large  proportion  of  the  funds  in  both  cases 
being  furnished  by  foreigners ;  and,  lastly,  the  issue  of  an  incon- 
vertible paper  currency  to  take  the  place  of  the  mixed  system  of 
coin  and  convertible  credit  which  formerly  prevailed.  The  passing 
of  the  Morrill  tariff  and  the  present  rigidly  protective  system  of 
the  United  States  will  be  the  subject  of  special  examination  in  a 
future  chapter.  For  our  present  purpose  it  will  be  sufficient  if  we 
attend  to  the  three  last  of  the  occurrences  named,  and  mainly  to 
the  consequences  involved  in  the  sudden  increase  in  foreign  indebted- 
ness, taken  in  connection  with  the  collapse  of  the  cotton  trade. 

Let  us  first  observe  the  scale  on  which  the  new  debt  was  created. 
It  amounted — we  may  say  in  round  numbers — to  about  five  hun- 
dred millions  sterling,  of  which  some  two  hundred  millions  were 
taken  by  foreigners.^  In  addition  to  this,  numerous  other  loans  were 
effected  on  State,  railway,  mining,  and  other  securities,  reaching 
in  the  aggregate  a  very  large  sum,  of  which  the  amount  that  found 
its  way  to  Europe  was,  according  to  Mr.  Wells,  not  less  than  one 
hundred  millions  sterling.  These  transactions  were  spread  over 
several  years — we  may  say  broadly,  over  the  last  three  years  of 
the  war,  and  the  two  or  three  immediately  succeeding.  Regarding 
them  as  they  affected  the  financial  relations  of  Europe  and  the 
United  States,  the  result  may  be  thus  stated :  Europe  undertook  to 
send  immediately,  that  is  to  say,  as  fast  as  the  several  obligations 
were  incurred,  some  £300,000,000  sterling  to  the  United  States ; 
while  the  United  States  on  her  side  engaged  to  pay  the  interest  on 

^See  Wells's  Report,  1869. 


INTERNATIONAL  VALUES  153 

this  sum  to  Europe  for  all  time,  or  until  the  principal  was  discharged. 
The  transactions,  as  I  have  said,  were  spread  over  some  five  or  six 
years,  and,  making  allowance  for  the  dividends  which  would  be 
accruing  on  the  investments  from  the  time  they  were  effected,  and 
which  might  be  used  as  a  set-off  against  the  principal  sums  still 
becoming  due  as  new  investments  were  made,  the  amount  required 
to  be  sent  from  Europe  to  the  United  States  during  the  period  under 
review  would  not  be  less  than  some  £40,000,000  sterling  annually. 
Under  ordinary  circumstances — in  such  a  state  of  external  trade, 
for  example,  as  had  existed  previous  to  i860 — so  enormous  and 
sudden  an  increase  of  payments  from  one  continent  to  the  other 
could  only  have  been  effected  through  the  medium  of  bullion.  The 
ordinary  flow  of  gold  from  New  York  to  Europe  would  have  been 
suddenly  checked,  and  a  counter-current  would  have  set  in  from 
Europe  to  New  York — operations  which  could  not  fail  to  produce 
a  profound  ferment  in  the  money  markets  of  the  two  continents. 
As  it  was,  however,  the  settlement  of  these  vast  transactions  occa- 
sioned very  little  disturbance  of  any  kind.  The  explanation  is  mainly 
to  be  found  in  another  of  the  circumstances  to  which  I  have  called 
attention,  the  collapse  of  the  cotton  crop ;  for  the  effect  of  this  was 
suddenly  to  leave  the  United  States  without  the  means  of  paying 
Europe  for  her  ordinary  importations  thence,  swollen  as  these  had 
recently  been  by  large  purchases  of  material  of  war.  In  the  result 
the  United  States  stood  largely  a  debtor  to  Europe  on  commercial 
account ;  while  on  financial  account  the  balance  was  not  less  decid- 
edly against  Europe ;  and,  the  amounts  on  both  sides  nearly  cor- 
responding, the  settlement  of  the  complex  transactions  became 
possible  by  the  simple  expedient  of  setting  off  one  class  of  obligations 
against  the  other.  This,  in  effect,  is  what  was  done.  The  reciprocal 
obligations  of  Europe  and  the  United  States  were  thus  adjusted  for 
the  time,  though  by  a  sort  of  financial  coup  de  main  that  could  not 
well  be  repeated ;  and  now  I  invite  the  reader  to  contemplate  the 
state  of  things  which  has  supervened. 

§  8.  On  the  termination  of  the  war  the  cultivation  of  cotton  was, 
of  course,  resumed,  and  already  that  staple,  as  an  article  in  the 
trade  of  the  United  States  with  Europe,  has  attained  its  former 
proportions,  if  not  in  quantity  at  least  in  value.    On  her  other 


154  CAIRNES 

domestic  exports  (in  which,  be  it  remembered,  specie  is  included) 
there  has  been  an  increase,  though  not  a  large  one,  and  only  during 
the  last  two  years.  But  while  this  has  been  the  case  as  regards 
exports,  her  imports  have  risen  from  335,200,000  dollars,  at  which 
they  stood  in  i860,  the  year  previous  to  the  war,  to  617,000,000 
dollars,  their  amount  according  to  the  latest  returns.  The  reader 
will  remember  that  previous  to  the  war  the  exports  of  the  United 
States  had,  as  a  normal  state  of  things,  exceeded  the  imports ;  the 
excess  on  this  account  during  the  ten  years  between  185 1  and  i860 
(inclusive)  having  amounted  to  an  average  sum  of  6,000,000  dol- 
lars annually.  Now,  however,  the  balance  is  on  the  other  side. 
It  is  the  imports  which  are  in  excess  of  the  exports.  In  the  live 
years,  1868-1872  (inclusive),  the  excess  amounted  on  an  average 
to  44,000,000  dollars  annually ;  while  in  the  last  year  of  the  period 
(1872)  it  grew  to  no  less  a  sum  than  116,000,000  dollars.  Now, 
from  the  explanations  already  given,  the  reader  will  understand  that 
such  a  state  of  external  trade,  assuming  it  be  sound  and  normal, 
would  imply  a  state  of  financial  relations  between  the  United  States 
and  Europe  in  which  the  former  country  was  largely  a  creditor 
of  the  latter ;  for  it  is  only  on  this  supposition  that  a  large  excess 
of  imports  over  exports  could  continue  consistently  with  national 
solvency.  So  far,  however,  from  the  facts  being  in  accordance  with 
this  supposition,  they  are  exactly  the  reverse  of  this.  The  United 
States  is  largely  a  debtor  to  Europe  on  financial  account,  while  her 
exports  are  not  even  sufficient  to  cover  her  commercial  liabilities. 
It  will  be  worth  while  to  consider  this  position  of  affairs  somewhat 
more  in  detail. 

As  I  learn  from  figures  given  by  Mr.  Wells  in  his  Report  for 
1868,  the  dividends  due  to  European  holders  of  United  States  stocks 
of  various  kinds  amounted  in  that  year  to  80,000,000  dollars.  This, 
however,  is  but  a  portion  of  her  extra  commercial  obligations  to 
Europe.  Her  remittances  to  foreign  countries  to  meet  the  expenses 
of  her  citizens  residing  or  traveling  abroad  reached  in  the  same 
year,  according  to  the  same  authority,  so  large  a  sum  as  25,000,000 
dollars,  and  it  does  not  appear  that  there  was  any  thing  exceptional 
in  this  expenditure.  Lastly,  we  learn  from  Mr.  Wells  that  an  annual 
debt  to  foreign  countries  of  24,000,000  dollars  more  is  incurred  on 
account  of  freights  carried  in  foreign  bottoms.    The  aggregate  of 


INTERNATIONAL  VALUES  155 

these  various  sums  is  129,000,000  dollars,  in  round  numbers  we 
may  say  about  £26,000,000  sterling;  and  this  sum  the  United 
States  has  to  pay  annually  to  foreign  countries,  over  and  above 
what  she  owes  on  account  of  her  importations.  Now,  as  I  have 
already  explained,  there  is  but  one  means  by  which  a  nation  can 
in  the  last  resort  discharge  her  liabilities  to  other  nations — namely, 
through  the  value  of  her  products  exported.  We  have  seen,  how- 
ever, that  the  exports  of  the  United  States,  as  things  now  stand, 
far  from  being  adequate  to  the  liquidation  of  her  annual  aggregate 
liabilities,  are  insufficient  to  meet  those  incurred  on  commercial 
account  alone ;  the  deficiency,  taking  the  average  of  the  last  five 
years,  having,  as  I  have  just  shown,  reached  the  large  sum  of 
44,000,000  dollars — let  us  say  in  round  numbers  about  £9,000,000 
sterling.  We  have  thus  a  balance  of  £9,000,000  on  commercial 
account,  plus  a  further  sum  of  £26,000,000  on  extra-commercial 
account — in  all  £35,000,000  sterling — due,  year  by  year,  by  the 
United  States  to  foreign  countries,  in  excess  of  what  the  value  of 
her  exported  goods  enables  her  to  discharge.  The  question  arises, 
How  is  this  liability  to  be  met?  How  it  has  been  met  up  to  the 
present  time  I  have  no  means  of  accurately  determining ;  but  one 
expedient,  we  know,  has  been  brought  extensively  into  requisition. 
During  the  period  since  the  war  the  sale  of  American  securities  in 
the  markets  of  Great  Britain  and  the  Continent  has  been  large  and 
increasing.  The  United  States  has  ceased,  indeed,  to  add  to  her 
public  debt,  and  has  even  made  some  progress  in  reducing  it,  but  it 
is  probable  that  the  proportion  of  this  debt  in  the  hands  of  Euro- 
pean holders  has  of  late  increased,  and  it  is  certain  that  the  amount 
of  European  capital  which  now  finds  its  way  to  private  investment 
in  America  is  immensely  greater  than  it  has  ever  been  at  any  former 
period.  Here,  then,  is  a  resource  which,  so  far  as  it  goes,  and  so 
long  as  it  lasts,  the  United  States  may  employ  in  liquidation  of 
her  uncovered  liabilities ;  the  sums  payable  by  Europe  in  purchase 
of  American  securities  being  as  much  available  in  discharge  of 
American  debts  as  if  they  were  obtained  in  payment  of  exports.^ 

1  The  mechanism  through  which  these  international  transactions  are  carried 
into  effect  is  the  Foreign  Exchanges.  I  have  not,  however,  thought  it  necessary 
to  enter  into  this  part  of  the  subject,  as  it  has  been  already  so  fully  and  lucidly 
expounded  by  Mr.  Goschen  in  his  work  on  the  "Foreign  Exchanges,"  to  which 
the  reader  is  referred. 


156  CAIRNES 

Whether  those  sums  have  hitherto  proved  sufficient  for  the  purpose 
required,  must,  for  the  moment,  remain  matter  for  conjecture,  but 
it  may  be  confidently  asserted  that,  in  any  case,  they  can  only  be 
regarded  as  a  temporary  make-shift.  No  nation  can  continue  to 
pay  its  foreign  debts  by  the  process  of  incurring  new  debts  to 
meet  a  balance  yearly  accruing  against  it ;  yet  this,  in  truth,  is  the 
nature  of  the  financial  operation  by  which  of  late  years  the  United 
States  has  contrived  to  settle  accounts  with  the  rest  of  the  world. 
Even  on  the  supposition  that  European  investment  is  to  continue 
on  its  present  scale,  the  interest  upon  it  would,  as  I  have  shown, 
come  in  time  to  exceed  the  principal  annually  invested ;  while  the 
balance  uncovered  by  exports  would  still  remain  absolutely  unpro- 
vided for.  These  considerations  lead  me  to  the  conclusion  that  the 
present  condition  of  the  external  trade  of  the  United  States  is 
essentially  abnormal  and  temporary.  If  that  country  is  to  continue  to 
discharge  her  liabilities  to  foreigners,  the  relation  which  at  present 
obtains  between  exports  and  imports  in  her  external  trade  must  be 
inverted.  Her  exports  must  once  again,  as  previous  to  i860,  be 
made  to  exceed  her  imports,  and  this  by  an  amount  greater  than 
the  excess  of  that  former  time  in  proportion  as  her  financial  obliga- 
tions to  foreign  countries  have  in  the  interval  increased.  This,  it 
seems  to  me,  is  a  result  which  may  be  predicted  with  the  utmost 
confidence.  The  end  may  be  reached  either  by  an  extension  of 
exportation,  or  by  a  curtailment  of  importation,  or  by  combining 
both  these  processes,  but  by  one  means  or  other  reached  it  will  need 
to  be.  It  is  simply  the  condition  of  her  remaining  a  solvent  nation. 
Ths  people  of  that  country  may,  therefore,  if  I  am  right  in  this  specu- 
lation, look  forward  to  witnessing  a  result  for  which  the  promoters 
of  their  present  commercial  policy  have  often  sighed  —  they  may 
expect,  before  many  years,  to  see  United  States  commodities  selling 
in  foreign  countries  in  vastly  greater  quantities  than  the  commodi- 
ties of  foreign  countries  in  the  markets  of  the  United  States.  How 
far  their  estimate  of  this  condition  of  their  trade  will  be  affected  by 
the  circumstance  that  a  large  proportion  of  the  proceeds  from  those 
augmented  foreign  sales  will  find  its  way  into  European  pockets, 
is  a  point  on  which  it  would  be  scarcely  becoming  in  the  present 
writer  to  offer  an  opinion. 


INTERNATIONAL  VALUES  157 

The  conclusion  just  stated  suggests  a  further  reflection.  A  change 
in  the  relation  of  exports  and  imports  in  the  trade  of  a  country  can 
only  be  effected  through  a  change  in  relative  prices  (measured  in 
gold  or  silver)  as  they  exist  in  that  country  and  in  those  with  which  it 
trades.  To  establish,  therefore,  an  excess  of  exports  over  imports  in  the 
trade  of  the  United  States,  in  lieu  of  the  balance  the  other  way  which 
now  exists,  prices  there  must  be  lowered  in  relation  to  prices  in 
Europe.  This  may  be  accomplished  partly  by  an  advance  in  prices 
here  not  shared  by  the  United  States,  as  in  fact  has  already  hap- 
pened in  the  case  of  some  important  commodities ;  but  it  is  prob- 
able that  the  end  will  be  reached  mainly  through  a  decline  of  prices 
on  the  other  side.  A  considerable  fall  of  general  prices,  however, 
is  a  remedy  to  which  manufacturers  and  merchants  will  only  sub- 
mit when  pushed  to  extremity.  It  will,  therefore,  only  come  when 
credit  has  been  strained  to  the  utmost,  and  a  catastrophe  is  seen  to 
be  inevitable ;  and  then  it  will  probably  come  with  a  crash.  For 
these  reasons  I  should  be  disposed  to  look  forward  to  the  immediate 
future  of  American  trade  as  a  period  of  much  disturbance  and 
fluctuation,  culminating,  it  is  possible,  from  time  to  time  in  com- 
mercial crises. 

In  offering  these  remarks  on  the  prospective  character  of  the 
external  commerce  of  the  United  States,  I  have  deliberately  ab- 
stained from  adverting  to  some  contingencies,  and  in  particular  to 
two,  which  can  not  fail,  more  or  less  seriously,  to  affect  it  —  I  mean 
the  course  that  country  may  adopt  with  regard  to  Protection,  as 
well  as  with  regard  to  the  redemption  of  her  paper  money.  I  have 
thus  far  avoided  these  topics,  because  I  do  not  conceive  that  any 
decision  she  may  come  to  with  reference  to  either — powerfully 
operative  as  no  doubt  it  will  be  on  her  future  commercial  fortunes 
in  various  directions — can  possibly  affect  the  particular  issue  to 
which  the  preceding  remarks  have  been  addressed.  A  persistent 
policy  of  Protection  will,  no  doubt,  have  the  effect  of  preventing  the 
due  expansion  of  her  external  trade  in  the  future  as  it  has  done  in 
the  past,  if  it  does  not  lead  to  its  positive  curtailment;  while  the 
adoption  of  free  trade  would  as  certainly  tend  to  its  rapid  develop- 
ment, and  thus  greatly  relieve  the  extreme  tension  of  the  situation. 
But,  under  all  circumstances,  if  the  United  States  is  to  remain  a 


158  CAIRNES 

solvent  nation,  she  must  contrive  to  send  a  larger  value  out  of  the 
country  than  is  received  into  it,  and  this  larger  value  can  take  no 
other  form  than  the  products  of  her  industry.  Free-trader  or  pro- 
tectionist, therefore,  an  excess  of  exports  over  imports  in  her  foreign 
trade,  sufficient  in  amount  to  discharge  her  international  liabilities, 
is  a  condition  she  can  not  evade. 

^  •■',:  t'  ^  ^  ^  ^  ^  ^  ^  -fi 


VI 

BULLOCK,  WILLIAMS,  AND  TUCKER :  THE  BALANCE 
OF  TRADE  OF  THE  UNITED  STATES^ 

L    The  History  of  our  Foreign  Trade  Balance  from 

1789  TO  1914 

^  ^  ^  ^  M,  ^  ^  ^  M,  M,  .IL. 

A  PRELIMINARY  word  is  necessary  concerning  sources  of 
information.  Statistics  of  international  commerce  always 
contain  an  element  of  error,  and  this  is  especially  true  of  the  only 
data  available  for  the  early  decades  of  our  national  existence. 
Prior  to  182 1  imports  admitted  free  of  duty  were  not  reported  at 
all,  and  those  subject  to  specific  duties  were  reported  by  quantity, 
not  value ;  moreover,  such  values  as  were  recorded  were  reckoned 
arbitrarily  at  10  or  20  per  cent  above  the  cost  of  the  articles  at 
their  port  of  origin,  to  allow  for  the  value  gained  in  transportation, 
i.e.,  the  freight  charges  and  importers'  profits.^  The  statistics  now 
accepted  as  official  for  this  period  were  made  up  in  the  Treasury 
Department  in  1835,  ^^^  ^^^  based  largely  on  estimates  and  com- 
parisons.^ The  figures  for  exports  are  more  complete,  though  per- 
haps not  more  accurate  than  those  for  imports,  as  there  was  little 
check  on  the  exporters'  valuations  and  they  are  believed  to  have 
been  too  high.  Beginning  in  182 1,  the  Annual  Reports  on  Com- 
merce and  Navigation  were  published  with  greater  or  less  regularity, 
and  there  was  probably  a  constant  improvement  in  the  character  of 
our  commercial  statistics.  For  many  of  the  items,  other  than  exports 
or   imports  of  merchandise,    that   contribute   to   the   international 

iC.  J.  Bullock,  J.  H.  Williams,  and  R.  S.  Tucker,  "The  Balance  of  Trade 
of  the  United  States,"  in  Review  of  Economic  Statistics,  July,  1919,  pp.  215- 
238. 

2 Pitkin,  Statistical  View  (1835  edition),  p.  163. 

3  For  the  period  1 790-1804  they  are  $154,000,000  greater  than  the  unofficial 
estimate  of  Blodget's  "  Economica."  See  Report  of  Secretary  of  Treasury, 
183s,  Apps.  C  and  D. 

159 


i6o 


BULLOCK,  WILLL'\MS,  AND  TUCKER 


dealings  of  the  United  States,  no  official  data  are  obtainable,  and 
we  are  compelled  to  rely  upon  mere  estimates  that  sometimes  have 
a  decidedly  conjectural  character.  Precise  computation,  therefore, 
is  impossible.  The  most  that  can  be  done  is  to  demonstrate  what 
the  general  tendencies  have  been  in  each  epoch  investigated. 


A.     FIRST    PERIOD,    1789    TO    1820:     EXCESS   OF   IMPORTS 
BALANCED  BY  PROFITS  OF  OUR  MERCHANT  MARINE 

The  first  period  that  we  shall  study  extended  from  1789  to  1820. 
It  witnessed  a  rapid  growth  of  our  commerce  up  to  the  year  1807, 


500 


ANNUAL  MERCHANDISE  EXPORTS  AND 


IMPORTS    OF 

After: 


THE 
1821 


UNITED     STATES', 


1914* 

873  silver  is  treated  as  merchandise' 

Exports 
Imports 


o..^ 


f^.  ,^' 


1821   1825    1830     1835     1810 
*  Fiscal  years;  units  of  $1,000,000 


1845 


1850 


1855 


1860 


1865 


1870 


when  such  events  as  the  Embargo,  Non-Intercourse  Acts,  and  the 
War  of  i8i2  affected  all  industry  most  injuriously.  After  the 
restoration  of  peace  in  1815,  a  period  of  wild  speculation,  fostered 
by  an  inflation  of  the  currency,  encouraged  large  importations  of 


UNITED  STATES  BALANCE  OF  TRADE 


i6l 


foreign  products.  These  were  viewed  as  a  sign  of  prosperity  while 
the  "boom"  lasted,  but  were  styled  an  inundation  of  European 
goods  as  soon  as  the  speculative  fever  abated.  The  reaction,  however, 


2500 


1870 


1875 


1880 


1885 


1890 


1895 


1900 


1905 


1910 


1914 


lowered  prices  and  checked  the  ilow  of  imports,  which  decreased 
rapidly  from  $147,000,000  in  1816  to  $74,000,000  in  1820. 

For  the  entire  period  of  thirty-one  years,  the  estimated  imports 
of    merchandise    and    specie    amounted    to    $2,350,628,000,    while 


1 62  BULLOCK,  WILLIAMS,  AND  TUCKER 

exports  were  placed  at  Si, 839,000,000,  an  "unfavorable"  balance  of 
$512,000,000.  By  using  different  estimates  we  can  get  a  balance  as 
small  as  $360,000,000  or  as  large  as  $535,000,000,  but  the  official 
estimate  seems  the  most  reasonable.  Nor  was  this  our  only  item  of 
international  indebtedness.  Foreign  capital  was  largely  represented 
in  the  debt  of  the  federal  government,  and  had  been  invested  in  the 
stock  of  the  first  Bank  of  the  United  States  and  in  other  enterprises. 
For  interest  on  all  such  investments  we  owed,  for  the  entire  period, 
a  sum  that  is  estimated  at  $200,000,000  or  more.  In  spite  of  this 
immense  balance  against  us  the  supply  of  specie  in  the  country  did 
not  decrease,  but  taking  the  period  as  a  whole  increased  consider- 
ably. Tench  Coxe^  estimated  the  amount  on  hand  in  1791  at 
$7,000,000.  Secretary  Crawford'  estimated  the  amount  on  Janu- 
uary  i,  1820,  at  $20,000,000,  of  which  $15,500,000  was  held  by  the 
banks ;  but  Gallatin,  revising  his  figures,  gave  nearly  as  large  a  sum 
($19,820,000)  for  the  amount  of  specie  in  the  banks  alone.  This 
is  the  more  striking  in  view  of  the  large  sums  said  to  have  been 
sent  to  China  and  India  in  those  years,  and  in  view  also  of  the 
redundancy  of  irredeemable  paper  during  and  after  the  War  of 
181 2.  How  then  was  this  unfavorable  balance  paid?  Contempo- 
raries agree  that  it  was  mainly  by  the  earnings  of  our  merchant 
marine.^  The  situation  was  analyzed  correctly  by  Timothy  Pitkin 
in  181 7.  He  showed  that  a  cargo  of  flour  shipped  to  Spain  in  an 
American  vessel  would  be  valued  at  $47,500  at  domestic  prices,  and 
would  figure  at  this  amount  in  the  returns  of  our  exports.  If  the 
flour  were  sold  in  Spain  at  the  usual  advance  necessary  to  cover 
freight,  insurance,  commissions,  and  a  fair  profit,  it  might  command 
as  much  as  $75,000.  Then,  if  the  proceeds  from  the  sale  were  in- 
vested in  a  return  cargo  that  would  be  valued  at  our  custom  houses 
according  to  the  prescribed  methods,  the  final  result  of  the  voyage 
would  be  the  importation  of  commodities  that  exceeded  very  greatly 
the  value  of  the  original  exports.    Therefore,  he  contended  that,  if 

I  View  of  the  United  States  (1794),  p.  352.  See  also  Sumner's  "Finances 
of  the  American  Revolution,"  Vol.  I,  pp.  99,  100,  for  o^her  contemporary 
estimates. 

-"Report  on  Currency,"  in  Finance  Reports,  Vol.  II,  p.  482. 

•'Seybert,  Statistical  Annals  (1818),  p.  281;  Pitkin,  Statistical  View  (1817), 
p.  246;  see  also  Gallatin  in  "American  State  Papers,  Commerce  and  Naviga- 
tion," Vol.  I,  p.  643. 


UNITED  STATES  BALANCE  OF  TRADE  163 

the  imports  had  not  shown  an  excess,  our  ships  would  have  incurred 
a  loss  on  their  voyages.  Moreover  there  was  a  vast  trade  done  by 
American  vessels  between  foreign  ports. 

The  exact  amount  earned  by  our  ships  cannot  be  ascertained. 
Estimates  vary  from  $450,000,000  to  $800,000,000.^  The  tonnage 
of  the  ships  registered  for  the  foreign  trade  amounted  for  the  entire 
period  to  20,000,000  tons  engaged  in  traffic  for  one  year.  Other 
credit  items,  such  as  the  proceeds  of  American  ships  sold  abroad, 
duties  retained  on  reexported  goods,  indemnities,  and  losses  by  foreign 
creditors  driring  our  financial  crises,  cannot  be  valued  with  any 
approximation  to  accuracy.  But  there  is  no  doubt  that,  taken 
together,  they  did  balance  and  more  than  balance  the  excess  of 
imports,  for,  during  most  of  the  period  under  consideration,  London 
exchange  was  at  a  discount  in  the  United  States,  in  spite  of  the  net 
import  of  specie  previously  mentioned,-  and  in  spite  of  the  reduction 
of  our  foreign  debt  and  the  repayment  of  foreign  capital  invested 
in  the  first  Bank  of  the  United  States. 

B.    SECOND  PERIOD,  1821  TO  1837:  EXCESS  OF  IMPORTS 
INCREASED  BY  INFLOW  OF  FOREIGN  CAPITAL 

The  second  period  in  the  history  of  our  foreign  trade  runs  from 
182 1  to  1837.  Like  the  preceding  it  was  marked  by  an  excess"  of 
imports.  During  the  first  part  of  it  our  commerce  showed  no 
material  increase  over  the  first  period,  but  after  1830  the  volume  of 
imports  increased  very  greatly — from  $62,720,000  in  1830  to  $176,- 
579,000  in  1836 — while  exports  increased  much  less  rapidly. 

Thi^  was  the  result  of  an  extraordinary  speculative  movement, 
which  culminated  in  the  crisis  of  1837.  During  these  years  popu- 
lation advanced  at  a  rapid  rate,  immigration  became  very  large,  and 
sales  of  public  land  increased  greatly.  The  state  banks  were  en- 
abled to  expand  their  note  issues  from  $61,000,000^  in  1830  to 
$103,000,000  in  1835,  the  notes  being  largely  used  in  payment 
for    the   land    occupied    by    settlers.     Then,    in    1836,    the    federal 

iW.  P.  Sterns,  in  Journal  of  Political  Economy,  Vol.  VI,  p.  195. 

2  Gallatin,  Considerations  on  Currency  and  Banking  (1831),  p.  SQ ;  Craw- 
ford, Report  on  Currency,  App.  E. 

3  The  specie  held  by  banks  increased  from  under  $20,000,000  in  1820  to  over 
$35,000,000  in  1837.    Cf.  Reports  of  Secretary  of  Treasury. 


1 64  BULLOCK,  WILLIAMS,  AND  TUCKER 

government  distributed  $28,000,000  of  surplus  revenue  among  the 
states,  this  money  finding  its  way  into  the  banks,  which  increased 
their  issues  to  $149,000,000  by  the  year  1837.  Such  an  inflation  of 
the  currency  raised  prices  and  invited  large  importations  of  mer- 
chandise. For  the  entire  period  imports  of  merchandise  aggregated 
$1,574,000,000  and  exports  were  placed  at  $1,389,000,000,  an  "un- 
favorable" balance  of  $185,000,000.  More  than  this,  the  movement 
of  specie  showed  an  excess  of  imports  amounting  to  $36,714,000; 
so  that  on  these  two  accounts  the  balance  of  importations  was  not 
less  than  $221,000,000.  Actually  it  must  have  been  considerably 
larger,  as  imports  were  always  undervalued ;  moreover  the  official 
valuation  of  the  pound  sterling  until  1832  was  only  $4.44,  on  which 
account  alone  some  $30,000,000  must  be  added  to  the  official 
figures  of  imports.^ 

The  indebtedness  of  the  country  was  increased  still  further  by 
whatever  sums  were  due  as  interest  to  foreign  investors,  but  these 
were  more  than  offset  by  new  investments.  Although  the  United 
States  by  1835  had  completely  paid  off  its  public  debt,  the  states 
had  begun  to  finance  banks  and  public  improvements,  and  borrowed 
during  the  period  $174,000,000,  of  which  $147,835,000  was  bor- 
rowed between  1830  and  1838.-  Part  of  this  was  simply  a  reinvest- 
ment of  money  previously  invested  in  the  federal  debt ;  part  was  a 
reinvestment  of  the  interest  on  previous  investments;  part  was 
owed  to  domestic  creditors;  but  the  greatest  part  was  actually  a 
fresh  flow  of  capital  from  abroad,  resulting  in  a  large  inflow  of 
goods  which  were  paid  for  only  in  obligations,  some  of  which  unfor- 
tunately were  ultimately  dishonored.  A  committee  of  the  House  of 
Representatives  which  made  its  report  in  1843  supposed  the  amount 
of  state  and  city  debt  held  abroad  at  that  time  to  be  $150,000,000, 
nearly  all  of  which  had  been  borrowed  before  1839.^  Foreign 
creditors  had  also  invested  in  some  of  our  railways,  but  the  sums  so 
invested  are  unknown.  As  the  amount  of  our  federal  debt  held  by  for- 
eigners at  the  beginning  of  this  period  was  only  about  $25,000,000,* 

1  Gallatin,  in  Sen.  Doc.  55,  22d  Cong.,  ist  sess.,  pp.5,  21.  Cf.  Sterns,  in 
Journal  of  Political  Economy,  Vol.  VIII,  p.  54. 

2 Tenth  Census  Report  on  Valuation,  Taxation,  and  Public  Indebtedness, 
pp.  527,  530.    Of  this  amount  $107,823,000  was  borrowed  after  1835. 

^House  Report  206,  27th  Cong.,  3d  sess.  (March  2,  1843),  pp.  3,  7. 

4  Seybert,  Statistical  Annals,  p.  757  (estimate  for  1818). 


UNITED  STATES  BALANCE  OF  TRADE  165 

the  amount  of  new  capital  invested  must  have  been  over  $125,- 
000,000,  and  the  amount  of  interest  accrued  about  $80,000,000. 
The  $45,000,000  of  new  investments  in  excess  of  the  total  due 
for  interest  went  part  way  to  cancel  the  balance  on  merchandise 
imports.  Another  contribution  to  this  end  was  the  money  brought 
here  by  immigrants,  who  numbered  over  550,000  during  these  years. 
Fifty  dollars  apiece  does  not  seem  excessive,  considering  that  these 
were  not  merely  migratory  laborers,  but  botm  fide  settlers ;  this 
would  amount  to  $11,000,000.  On  the  other  hand  there  is  the  money 
spent  by  Americans  traveling  abroad,  which  there  is  no  means  of 
ascertaining.  These  two  last  items  may  be  assumed  to  offset  each  other. 
During  these  years  many  American  vessels  were  sold  abroad. 
Sales  of  172,000  tons^  at  $50  a  ton-  give  the  United  States  a  credit 
of  over  $8,000,000.  For  this  period,  however,  as  in  the  preceding 
one,  the  greatest  factor  in  settling  our  foreign  indebtedness  was  the 
earnings  of  our  merchant  marine.  There  are  several  possible  ways 
of  reckoning  their  amount ;  exact  statistics  of  course  are  lacking. 
One  way  is  to  multiply  the  amount  of  registered  tonnage  by  the 
average  earnings  per  ton  as  stated  by  contemporary  observers.^ 
Another  method  is  based  on  the  amounts  of  imports  and  exports 
carried  in  American  and  foreign  vessels :  since  American  consumers 
must  bear  the  expense  of  bringing  merchandise  to  this  country,  the 
freight  charges  on  goods  brought  in  foreign  vessels  will  be  reckoned 
as  an  element  in  our  international  indebtedness,  while  the  sums 
earned  by  American  vessels  in  the  import  trade  will  be  considered 
to  have  no  effect  upon  the  foreign  exchanges.*    Similarly,  with  our 

1  Annual  Reports  on  Commerce  and  Navigation. 

2 Sterns,  in  Journal  of  Political  Economy,  Vol.  VI,  p.  193.  Cf.  Kettell,  in 
"Eighty  Years  Progress,"  Vol.  I,  p.  167,  who  reckons  values  at  $100  per  ton 
at  a  somewhat  later  period. 

3  In  connection  with  this  method  a  deduction  must  be  made  of  the  amount 
of  freight  paid  by  Americans  on  goods  imported  into  this  country. 

*Until  1832,  with  the  exception  of  four  years  (1795-1799),  the  statutes 
required  imports  subject  to  ad  valorem  duties  to  be  entered  at  10  per  cent 
above  actual  cost,  or  20  per  cent  if  from  beyond  the  Cape  of  Good  Hope. 
This  addition  would  approximately  cover  the  freight  charges,  if  it  had  applied 
to  all  imports;  but  after  1820  other  imports  were  valued  as  at  place  of  origin. 
Before  1820  the  value  of  goods  not  subject  to  ad  valorem  duties  was  not 
recorded,  but  the  Treasury  Department  in  1835  converted  the  recorded  quanti- 
ties into  values  as  at  place  of  importation.  In  strict  accuracy  the  freights 
earned   by    foreign    vessels   bringing    these   goods   here   should   be    separately 


1 66  BULLOCK,  WILLIAMS,  AND  TUCKER 

exports,  we  shall  estimate  that  other  countries  are  indebted  to  the 
United  States  for  freights  on  goods  carried  in  American  vessels, 
and  that  cargoes  shipped  in  foreign  bottoms  may  be  omitted  from 
our  computations.  Estimates  of  the  probable  proportion  between 
freight  charges  and  the  values  of  the  products  carried  range  from 
10  to  15  per  cent.  On  account  of  the  greater  bulk  of  our  exports 
we  may  use  the  latter  estimates  for  exports  and  the  former  for  im- 
ports.^ The  first  method  of  reckoning  gives  us,  at  $33^  per  ton,^ 
$206,000,000  for  the  balance  of  earnings  accruing  to  the  United 
States  from  ocean  transportation;  the  second  method  gives  $176,- 
000,000,  taking  no  account  of  the  earnings  of  American  vessels  in 
trade  between  foreign  countries,  which  must  have  amounted  to  at 
least  $30,000,000.  ... 

The  outstanding  features  of  this  period  then  are : 

( 1 )  An  excess  of  merchandise  imports  did  not  cause  an  outflow  of 
specie. 

(2)  Although  there  was  little  mining  of  precious  metals,  and 
paper  substitutes  for  money  were  in  common  use,  the  amount  of 
specie  in  the  country  increased. 

(3)  The  earnings  of  our  merchant  marine  were  insufficient  to 
pay  the  balance  due  to  foreign  countries. 

(4)  This  deficiency  was  remedied  by  the  willingness  of  foreign 
capitalists  to  invest  in  American  enterprises. 

At  the  end  of  the  period  there  was  an  unsettled  balance  against 
us,  and  sterling  exchange  was  at  a  premium.^ 

reckoned,  but  that  is  not  possible  except  roughly,  and  in  view  of  the  lar^e 
element  of  conjecture  involved  in  this  method  of  reckoning  freights  would  not 
be  worth  while.  For  the  same  reason  no  deduction  is  made  to  represent  the 
earnings  of  American  vessels  bringing  in  goods  subject  to  ad  valorem  duty 
between  1820  and  1832.  Sterns  held  that  the  additional  percentage  was  only 
enough  to  offset  undervaluation.  (Journal  of  Political  Economy,  Vol.  VIII, 
p.  54.)  Cf.  Report  of  Secretary  of  Treasury,  1835  ;  also  Pitkin,  Statistical  View 
(1835  edition),  pp.  164,  165. 

iCf.  Sen.  Doc.  55,  22d  Cong.,  ist  sess.,  Vol.  I,  pp.  21,  2q,  for  Gallatin's 
opinion. 

-Sterns,  in  Journal  of  Political  Economy,  Vol.  VIII,  p.  53,  and  Vol.  VI, 
p.  194.  The  data  for  these  computations  may  be  found  in  the  "Report  on 
Commerce  and  Navigation"  (187S),  Pt.  I,  pp.  Ixxi,  149. 

3  Trotter,  Finances  of  American  States,  App.  I. 


UNITED  STATES  BALANCE  OF  TRADE  167 

C.    THIRD  PERIOD,   1838  TO   1849:    AN  EXCESS  OF  EXPORTS 
DUE  TO  INTEREST  PAYMENTS  ON  FOREIGN  INDEBTEDNESS 

The  next  period,  1838-49,  differs  from  the  years  preceding  in 
that  the  excess  of  merchandise  imports  that  had  previously  been 
characteristic  of  our  foreign  trade  was  temporarily  suspended.  The 
recorded  imports  of  merchandise  aggregated  $1,358,000,000,  while 
exports  were  estimated  at  $1,392,000,000.  Thus  a  small  balance  of 
$34,000,000  stood  to  the  credit  of  the  United  States.  At  the  same 
time  imports  of  gold  and  silver  had  exceeded  exports  by  $36,000,000  ; 
so  that  the  movements  of  merchandise  and  specie  had  reached 
approximately  a  condition  of  equilibrium. 

This  period  opened  with  several  years  of  continued  depression,  as 
a  consequence  of  the  panic  of  1837  and  after  that  a  second  general 
bank  suspension  in  1839.  It  was  not  until  1844  that  conditions 
began  to  improve  and  the  foreign  commerce  of  the  country  showed 
a  decided  increase.  In  1847  the  exchanges  were  affected  greatly  by 
the  famine  that  followed  the  failure  of  the  potato  crop  in  Ireland. 
This  event  caused  a  remarkable  increase  in  our  exports  of  bread- 
stuffs  which  rose  from  $7,445,000  in  1845  to  $53,262,000  in  1847. 
The  result  was  that  our  exports  of  merchandise  exceeded  imports, 
in  the  year  last  mentioned,  by  $34,317,000.  Such  a  sudden  dis- 
turbance of  trade  caused  a  net  importation  of  specie  amounting  to 
$22,214,000.  This  large  inflow  of  money  altered  the  condition  of  the 
exchanges;  so  that  in  1848  imports  increased  by  $26,000,000,  while 
exports  declined  more  than  $18,000,000,  and  a  balance  of  $9,481,000 
of  specie  was  exported. 

Why  were  our  imports  paid  for  entirely  with  goods  or  specie,  in- 
stead of  partly  with  services  and  securities  as  before  ?  It  was  partly 
because  we  were  able  to  export  more,  owing  to  the  opening  of 
communication  with  the  West ;  partly  because  we  had  difficulty  in 
borrowing  abroad,  and  in  consequence  were  unable  to  buy  foreign 
goods  as  freely  as  in  the  years  just  preceding.^ 

The  panic  of  1837  had  checked  the  growth  of  state  debts,  and 
by   1839  European  investors  were  thoroughly  afraid  of  American 

iThe  high  duties  imposed  by  the  Tariff  Act  of  1842,  and  especially  the 
requirement  that  duties  must  be  paid  in  cash,  cut  down  imports  for  a  few 
years,  but  in  1S46  the  rates  were  again  reduced. 


1 68  BULLOCK,  WILLIAMS,  AND  TUCKER 

investments.  How  much  capital  they  lost  by  repudiation  of  state  debts 
and  by  the  failures  of  those  years  cannot  be  stated  ;^  but  it  was  a  long 
time  before  they  again  became  eager  to  risk  their  money  in  American 
enterprises."  Nevertheless  in  the  first  two  years  of  this  period  con- 
siderable sums  had  been  invested,  and  toward  the  end  confidence 
began  to  return.  The  value  of  American  securities  held  by  foreigners 
was  between  $150,000,000  and  $200,000,000  at  the  beginning  of  the 
period,  and  was  estimated  at  $222,000,000  by  the  Secretary  of  the 
Treasury  in  1853.^  The  average  for  the  years  1838-49  may  have 
been  $200,000,000,  upon  which  the  aggregate  interest  charges  would 
amount  to  $144,000,000,  against  which  must  be  entered  the  amount 
of  new  foreign  investment,  probably  not  over  $40,000,000. 

Upon  the  other  hand,  our  merchant  marine  was  still  active  on  the 
high  seas,  and  over  four-fifths  of  our  imports  and  exports  were  car- 
ried under  the  American  flag.  On  account  of  ocean  freights,  the 
United  States  was  entitled  to  a  credit  of  $142,000,000  by  the  method 
of  reckoning  from  the  value  of  imports  and  exports  previously 
described.  Cargoes  carried  by  our  ships  between  foreign  ports  in- 
creased the  earnings  of  the  merchant  marine ;  and  were  probably 
more  than  sufficient  to  balance  any  foreign  outlays  occasioned  by  the 
operations  of  our  army  during  the  Mexican  War.* 

Other  items  may  be  roughly  estimated  as  follows :  from  the  sale 
of  ships,  123,000  tons"^  at  $50  per  ton  equal  $6,150,000;   money 

1  English  stockholders  in  the  Bank  of  the  United  States  lost  $20,000,000 
(Sumner,  History  of  Currency,  p.  152). 

-Pearson,  American  Railway  Builder,  pp.  41,  45;  Kettell,  in  "Eighty  Years 
Progress,"  Vol.  I,  p.  152. 

3Sen.  Exec.  Doc.  42,  33d  Cong.,  ist  sess.  (March  2,  1854),  p.  2.  House 
Report  296,  27th  Cong.,  3d  sess.  (March  2,  1843),  p.  7. 

^W.  P.  Sterns,  in  his  article  in  the  Journal  of  Political  Economy,  Vol.  VHI, 
p.  53,  reckons  that  one-fifth  of  American  registered  tonnage  was  engaged  in 
the  carrying  trade  between  foreign  ports  in  the  years  1820-1840.  Assuming 
that  this  was  still  true,  the  freights  so  earned,  at  $33,,  per  ton,  would  amount 
to  $72,000,000  in  the  period  1838-1849.  The  excess  of  expenditures  of  the  War 
and  Navy  Departments  between  April  i,  1846,  and  April  i,  1849,  above  the 
normal  amounts  for  the  three  previous  years  was  about  $64,000,000.  During 
the  fiscal  year  1849  there  was  also  paid  to  the  Mexican  government  some 
$5,500,000  under  the  terms  of  the  treaty  of  peace.  On  the  other  hand,  it  is 
certain  that  a  large  part  of  these  expenditures  was  in  payment  of  goods  and 
services  provided  by  Americans,  and  would  not  affect  our  foreign  balance,  so 
only  $25,000,000  is  entered  under  this  head  on  our  balance  sheet. 

5  Annual  Report  on  Commerce  and  Navigation  (1873),  p.  920. 


OUR  BALANCE  OF  TRADE  169 

brought  by  immigrants,  at  $50  each,  about  $75,000,000;  money 
spent  by  Americans  abroad,  65,000  tourists  at  $1300  apiece  equals 
$84,500,000 ;  money  remitted  by  immigrants  to  their  families,  at 
least  $15,000,000.^ 

Although  most  of  the  figures  here  presented  are  only  rough 
estimates,  the  outstanding  features  of  this  period,  which  distinguish 
it  from  all  previous  and  subsequent  periods  in  the  history  of  our 
foreign  trade,  are  certain  enough ;  that  is,  that  for  twelve  years  our 
material  imports  barely  equaled  our  material  exports,  an  excess  of 
merchandise  exports  paying  for  an  excess  of  specie  imports ;  while 
the  earnings  of  our  merchant  marine,  which  had  previously  been 
brought  home  in  the  form  of  goods,  thus  swelling  the  volume  of 
imports,  were  now  required  to  settle  our  indebtedness  to  foreigners 
on  account  of  immaterial  items,  especially  interest. 

D.    FOURTH  PERIOD,  1850  TO  1873  :  EXCESS  OF  IMPORTS  RE- 
STORED BY  GROWTH  OF  DOMESTIC  GOLD  PRODUCTION  AND 
BY  FURTHER  INFLOW  OF  FOREIGN  CAPITAL 

The  fourth  period  in  the  history  of  our  foreign  trade  witnessed 
a  return  of  the  unfavorable  balance  which,  but  for  the  brief  period 
of  1838-49  just  reviewed,  was  the  characteristic  condition  from  the 
beginning  of  our  study  down  to  1874.  As  is  shown  in  the  table  on 
page  171,  the  trade  balance  was  unfavorable  in  twenty-two  out  of  the 
twenty-four  years  which  comprise  this  period.  Only  in  1858  and  in 
1862  was  there  an  excess  of  exports  over  imports,  and  in  those  years 
the  excess  was  inconsiderable. 

This  period  begins  with  the  discovery  of  gold  in  California  in 
1850.  It  ends  with  the  speculative  outburst,  characterized  by  fever- 
ish railroad  expansion  and  large  foreign  borrowings,  which  termi- 
nated with  the  panic  of  1873.  It  includes  the  period  of  the  Civil 
War,  when  our  foreign  trade,  especially  the  exports,  was  markedly 
restricted.  It  witnesses  large  sales  of  our  ships,  and  the  passing  of 
our  merchant  marine  as  an  important  credit  factor  in  our  balance  of 
international  payments.  These  were  the  main  features  of  the  period  ; 

iKettell,  in  "Eighty  Years  Progress,"  Vol.  I,  pp.  243,  244.  He  estimates 
tourists'  average  expenditures  at  $1800,  of  which  $600  was  passage  money, 
usually  paid  to  American  ship  owners. 


170  BULLOCK,  \VILLL\MS,  AND  TUCKER 

and  of  these  the  dominant  ones  were  gold  production  and  export,  and 
the  borrowing  of  foreign  capital. 

The  merchandise  trade  experienced  a  notable  growth,  the  annual 
average  of  the  combined  exports  and  imports  being  $613,000,000, 
as  against  $227,000,000  in  the  period  1838-49,  an  increase  of 
169  per  cent.  The  yearly  average  of  exports  was  $274,000,000,  as 
against  $116,000,000  in  the  preceding  period;  and  of  imports, 
$339,000,000,  as  against  $113,000,000.  This  extraordinary  increase 
of  imports,  almost  threefold,  was  the  most  striking  feature  on  the 
debit  side  of  our  international  balance. 

The  accompanying  table  presents  the  annual  trade  balances  for 
the  period.  The  first  four  columns  are  for  merchandise  only  ;  the 
last  two  show  the  net  annual  movement  of  gold  and  silver.^ 

As  regards  the  merchandise  trade,  the  most  noteworthy  facts 
shown  by  the  table  are  the  marked  decline  of  exports  during  the 
Civil  War  and  the  extraordinary  expansion  of  imports  in  the  late 
sixties  and  early  seventies.  In  the  five-year  period  1861-65  exports 
amounted  to  only  $940,000,000,  or  but  64  per  cent  of  the  total  for 
the  preceding  five  years  ($1,474,000,000),  and  52  per  cent  of  the 
total  for  the  five  years  after  the  war  ($1,605,000,000).  This  de- 
crease was  due  entirely  to  the  cutting  off  of  cotton  by  the  war.  In 
the  year  ending  June  30,  i860,  exports  of  cotton  amounted  to  $192,- 
000,000,  and  in  the  fiscal  year  1866  to  $281,000,000.  In  the 
last  year  prior  to  the  war  cotton  constituted  57  per  cent  of  the  total 
value  of  exports,  and  in  the  first  year  following  the  war,  81  per  cent. 
But  in  1 86 1  exports  of  cotton  shrank  to  $34,000,000,  and  in  1862 
they  were  only  $1,180,113.  In  none  of  the  war  years  after  1861 
did  they  amount  to  $10,000,000. 

The  expansion  of  imports  after  the  war  was  even  more  striking 
than  the  preceding  fall  in  exports.  During  the  war  the  import 
trade  had  been  somewhat  restricted,  though  not  markedly  so  except 
in  1862,  when  imports  fell  off  $100,000,000  (from  $289,000,000  in 
1 86 1  to  $189,000,000  in  1862).    For  the  whole  war  period  imports 

^Gold  and  silver  are  not  stated  separately  in  our  foreign  trade  statistics  prior 
to  1864,  but  in  the  Statistical  Abstract  of  the  United  States  for  iqoq  the 
annual  imports  and  exports  are  estimated  back  to  1850.  It  has  seemed  best 
in  this  table,  for  the  sake  of  consistency  in  comparison,  to  present  the  com- 
bined figures  for  the  entire  period.    The  great  bulk  of  the  exports  was  of  gold. 


UNITED  STATES  BALANCE  OF  TRADE 


171 


UNITED  STATES   BALANCE  OF  TRADE  1850-73 
(Units  of  $1,000,000) 


Fiscal 

Exports 

Imports 

Balance 

Net  Movement  of  Gold 
AND  Silver 

Years 

Excess  of 

exports  (+) 

Excess  of 
imports(— ) 

Excess  of 
exports  (+) 

Excess  of 
imports  (— ) 

1850 
1851 
1852 

1853 

1854 

1855 
1856 

1857 

1858 

1859 

i860 

1861 

1862 

1863 

1864 

1865 

1866 

1867 

1868 

1869 

1870 

1871 

1872 

1873 

144 
189 
167 
203 
236 
219 
281 

294 

272 

293 
334 
220 
190 
204 

159 
166 

349 
295 
282 
286 

393 
443 
444 

522 

"74 
21 1 
207 
264 
298 
258 
310 
348 
263 

331 

354 
289 
1S9 

243 
316 

239 
435 
396 
357 
418 

436 
5-0 
627 
642 

9 

I 

29 
22 
40 
60 
62 

39 
29 

54 

38 
20 

70 

39 
158 

73 
86 

Id 
75 

131 
43 
77 

182 

120 

2.9 

24.0 
37-2 

23-3 

34-3 
52.6 
41.5 
567 
33-4 

56.5 
58.0 

20.5 
54-6 

92-3 
57-8 

75-3 
38.8 

79.6 

37-3 
317 

77.2 

66.1 
63.1 

16.5 

Total 

6585 

8125 

1541  Net  Imports 

1098.2  Net  Exports 

Yearly 
Average 

274 

339 

64  Net  Imports 

45.8  Net  Exports 

amounted  to  $1,276,000,000, 
preceding  five-year  period  ($1 
dinary  expansion.  In  1866 
almost  double  the  figure  for 
the  five  years  1866-70  was  I 
the  expansion  was  even  more 
imports  of  $642,000,000,  the 


or  80  per  cent  of  the  total  for  the 
,604,000,000).    Then  came  an  extraor- 

imports   amounted    to    $435,000,000, 

1865  ($239,000,000).  The  total  for 
•2,042,000,000.  In  the  early  seventies 
pronounced,  culminating  in  1873  with 

largest  amount  imported  in  any  year 


172  BULLOCK,  WILLIAMS,  AND  TUCKER 

prior  to  1880.  Taking  the  eight-year  period  1866-73,  imports 
amounted  to  $3,831,000,000,  an  increase  of  175  per  cent  over  the 
imports  of  the  preceding  eight  years  ($2,224,000,000),  and  a  figure 
equal  to  46  per  cent  of  the  imports  for  the  twenty-four  years  from 
1850  to  1873. 

This  remarkable  outburst  in  the  import  trade  was  the  result  of  a 
number  of  forces  which  combined  to  make  the  eight  years  following 
the  Civil  War  one  of  the  greatest  "boom"  periods  in  our  history. 
On  December  30,  1861,  specie  payments  were  suspended  throughout 
the  country;  and  with  the  act  of  February  25,  1862,  the  government 
began  its  issues  of  inconvertible  paper  currency.    By  January  17, 

1863,  the  total  amount  authorized  was  8450,000,000,  and  on  June  30, 

1864,  the  total  amount  outstanding  was  $431,000,000.  After  a 
half-hearted  attempt  at  contraction,  by  the  act  of  April  12,  1866, 
under  which  $44,000,000  of  greenbacks  were  retired,  contraction  was 
abandoned,  and  greenbacks  in  circulation  mounted  from  $314,704,- 
000  in  the  middle  of  1869  to  $346,168,000  in  1872. 

Extravagant  issues  of  inconvertible  paper,  combined  with  heavy 
military  expenditures  and  the  destruction  of  economic  goods  insepa- 
rable from  war,  caused  a  violent  rise  of  prices  and  intensified  the 
speculative  movement.  So  far  as  high  prices  represented  mere  de- 
preciation of  paper  currency,  they  could  not  stimulate  imports,  since 
foreigners  did  not  exchange  commodities  for  paper  but  received 
payment  in  gold  values.  It  is  certain,  however,  that  the  speculative 
mania  had  raised  gold  prices  above  the  European  level,  so  that  the 
inflow  of  commodities  was  greatly  stimulated.  Moreover,  the  finan- 
cial extravagance  of  the  government  was  paralleled  by  that  of  the 
people,  an  additional  factor  in  inducing  large  imports. 

Another  distinctive  feature  of  the  period  was  railroad  expansion. 
Within  eight  years  from  the  termination  of  the  war  the  railway 
mileage  of  the  United  States  doubled,  the  total  increase  amounting 
to  31,800  miles.  With  the  extension  of  the  railway  net  there  was 
a  rush  of  population  to  the  West,  a  movement  which  resulted  in 
that  remarkable  growth  of  agricultural  exports  which  characterized 
the  next  period  of  our  study.  To  provide  the  means  for  this  devel- 
opment European  capital  was  drawn  upon  in  a  volume  enormous 
for  the  time.  These  borrowings  consisted  in  part  of  a  demand  for 
British  construction  materials  for  our  new  railroads.    Imports  of 


UNITED  STATES  BALANCE  OF  TRADE  173 

iron  and  steel  railroad  bars  in  the  seven  years  1866-72  amounted 
to  2,112,063  tons,  or  six  times  the  total  for  the  ensuing  seven 
years  (350;553  tons). 

For  the  whole  period  1850-73  the  total  exports  of  merchandise 
amounted  to  $6,585,000,000  and  the  imports  to  $8,125,000,000, 
giving  an  excess  of  imports  of  $1,541,000,000,  or  an  average  excess 
of  $64,000,000  a  year.  This  unfavorable  balance  on  merchandise 
account  was  greatly  reduced  by  our  large  exports  of  gold.  Upon  the 
opening  of  the  California  mines,  our  domestic  gold  output  suddenly 
rose  from  insignificant  proportions^  to  $50,000,000  in  1850,  about 
$14,000,000  more  than  the  annual  average  gold  production  of  the 
world  in  the  preceding  decade.  From  185 1  to  i860,  the  aggregate 
production  of  gold  in  the  United  States  was  $521,000,000,  which 
was  five  or  six  times  the  estimated  specie  circulation  of  the  country 
in  any  year  before  the  discoveries  in  California.  The  money  in 
circulation  in  1850,  including  bank  notes  as  well  as  specie,  was  no 
more  than  $279,000,000,  or  about  $12  per  capita.  If  the  new  gold 
could  have  been  retained  in  the  country,  our  currency  would  have 
risen  to  $800,000,000,  or  $25.8  per  capita.  Such  a  sudden  inflation 
as  this  would  have  raised  prices  far  beyond  the  level  prevailing  in 
other  parts  of  the  world,  put  an  end  to  the  exportation  of  many 
products,  and  attracted  imports  from  all  quarters  of  the  globe. 
Therefore,  the  new  gold  began  to  flow  out  of  the  country,  after 
prices  had  been  raised  to  a  point  at  which  the  import  trade  could 
increase  sufficiently  to  produce  that  result;  and  from  185 1  to  i860 
we  exported  a  net  balance  of  $417,608,000.  By  i860,  our  specie 
circulation  had  risen  to  $228,000,000,  while  the  issues  of  bank  notes 
had  grown  to  $207,000,000,  giving  the  country  a  supply  of  money 
that  averaged  $13.85  per  capita.  With  the  suspension  of  specie  pay- 
ments in  1862  and  the  depreciation  of  the  greenbacks,  the  outflow 
of  gold  in  payment  for  imports  was  intensified.  In  1864,  when  the 
premium  on  gold  rose  to  the  extraordinary  height  of  $1.85^  (July), 
exports  of  gold  rose  to  $100,662,000,  a  figure  not  again  equaled 
until  the  panic  year  of  1893.  For  the  total  period,  1850-73,  gold 
exports  amounted  to  $1,165,699,000,  and  imports  to  $203,234,000, 

^  From  1834  to  1847  the  annual  product  had  averaged  less  than  $1,000,000. 
In  1848  it  suddenly  rose  to  $10,000,000,  and  in  1849  to  $40,000,000. 
2  That  is,  a  dollar  of  gold  sold  for  $2.85  of  paper. 


174  BULLOCK,  WILLIAMS,  AND  TUCKER 

giving  a  net  outflow  of  $962,465,000,  which  is  $40,333,000  a  year. 
Including  silver,  the  net  outflow  of  specie  was  $1,098,200,000,  or  an 
annual  average  of  $45,800,000.  Subtracting  this  figure  from  the  ex- 
cess of  merchandise  imports  previously  given  ($1,541,000,000),  the 
net  balance  of  merchandise  and  specie  is  reduced  to  $443,000,000, 
or  an  annual  average  of  $18,400,000. 

Against  this  net  balance  are  to  be  charged  the  invisible  items  of 
indebtedness,  the  chief  of  which  are  freight  charges  and  foreign 
borrowings.  The  Civil  War  marked  the  passing  of  our  merchant 
fleet.  From  that  time  on,  the  profits  of  shipping,  which,  as  we  have 
seen,  had  been  the  chief  factor  in  maintaining  the  equilibrium  of 
our  foreign  exchanges,  ceased  to  be  a  credit  item,  and  became  grad- 
ually an  important  feature  of  our  debit  account.  The  change  is 
noticeable  on  comparing  the  decade  of  the  fifties  with  the  remainder 
of  our  period.  From  1850  to  i860,  exports  carried  in  American 
vessels  exceeded  imports  brought  to  our  shores  in  foreign  vessels 
by  $1,329,100,000;  and  the  freight  earnings  were  $330,000,000  by 
American  ships  (on  $2,196,300,000  exports  carried)  and  $87,000,000 
by  foreign  ships  (on  $867,200,000  imports  carried),  or  a  net  credit 
to  the  United  States  of  $243,000,000.  In  1862  there  began  a  sale 
of  American  ships  which  increased  in  the  three  following  years.  The 
total  sales  in  the  period  1862-65  have  been  estimated  at  $40,000,- 
000.^  The  decline  of  American  carrying  was  abrupt.  From  $279,- 
083,000  of  exports  carried  in  American  bottoms  in  i860,  the  amount 
fell  to  $179,973,000  in  1861,  and  by  1865  it  had  fallen  to  $93,018,- 
000.  Thereafter  it  ranged  from  $150,000,000  to  $200,000,000  dur- 
ing the  remainder  of  the  period.  The  total  value  of  exports  carried 
in  American  ships  from  1861  to  1873  was  $2,085,100,000,  while 
imports  carried  in  foreign  vessels  increased  to  $3,586,486,000.  The 
freight  charges  earned  by  American  ships  were  $313,000,000  and 
those  owed  to  foreign  shipping  were  $359,000,000.  For  the  first 
time  in  our  history  as  a  nation,  we  had  a  net  debit  on  freight  account, 
amounting  to  $46,000,000  for  the  thirteen  years  ending  in  1873. 
Regarding  the  period  1850-73  as  a  whole,  and  taking  into  account 
the  $65,000,000  received  for  ships  sold  as  well  as  the  earnings  of 

1  Bates,  American  Marine,  p.  150.  Of  1,298,000  tons  sold  in  1850-1873, 
825,000  were  sold  in  1862-1865. 


UNITED  STATES  BALANCE  OF  TRADE  175 

our  ships  in  the  fifties,  we  arrive  at  a  net  sum  of  $262,000,000 
receivable  by  the  United  States. 

If  we  sum  up  the  net  balances  of  merchandise,  specie,  and  ship- 
ping earnings,  we  find  a  total  on  the  debit  side  of  our  balance  of 
payments  amounting  to  $181,000,000.  We  turn  now  to  the  bor- 
rowings of  foreign  capital  and  the  payments  of  interest.  Foreign 
investments  in  the  United  States  were  estimated  at  $222,000,000 
by  the  Secretary  of  the  Treasury  in  1853.^  By  i860  they  were 
estimated,  also  by  the  Secretary  of  the  Treasury,  at  $400,000,000.^ 
At  the  outbreak  of  war  in  1861  great  distrust  in  the  future  of  the 
United  States  was  felt  by  foreigners,  and  there  was  a  considerable 
return  of  American  securities  in  1861-63,^  amounting  to  about 
$200,000,000.  But  for  the  next  ten  years  the  movement  of  capital 
turned  in  the  other  direction.  The  federal  government  had  incurred 
an  interest-bearing  debt  of  $2,381,000,000,  and  state  and  local  in- 
debtedness had  increased  by  some  $500,000,000.  By  1868,  accord- 
ing to  Hunt's  Merchant's  Magazine,  $700,000,000  of  United  States 
bonds  were  held  abroad,  and  these  had  not  netted  the  American 
sellers  more  than  57^  per  cent.^  Secretary  McCulloch  estimated  the 
foreign  investments,  exclusive  of  railway  stocks,  at  $850,000,000. 
All  together  the  amount  oi  American  securities  held  abroad  was  esti- 
mated at  $938,000,000,^  part  of  which  Europe  had  bought  at  a 
discount.  In  the  later  sixties  and  early  seventies  occurred  the  great 
expansion  of  railroads  already  referred  to,  when  39,642  miles  were 
constructed,  with  the  aid  of  a  large  inflow  of  foreign  capital.  In 
1869,  David  A.  Wells  put  the  total  foreign  investments  of  all  sorts 
at  $1,400,000,000.  Even  if  this  estimate  was  too  large  in  1869,  it 
is  certain  that  not  less  than  $1,500,000,000°  of  foreign  investments 
had  been  made  by  1873  ;  because  the  inflow  of  capital  had  been 
very  rapid  in  the  interval,  amounting  to  $100,000,000  in  the  first 
eight  months  of  the  latter  year.    From  the  figures  given  it  appears 

1  House  Report  2g6,  27th  Cong.,  3d  sess.  (March  2,  1843),  p.  7. 
'^Hunt's  Merchant's  Magazine,  October,  1868,  p.  242. 

3  David  A.  Wells,  Report  of  Special  Commissioner  of  the  Revenue,  1869,  p.  xxvi. 
4 October,  1868,  p.  245.   This  is  perhaps  an  excessive  estimate  of  the  deprecia- 
tion of  the  whole  volume  of  securities. 

^Hunt's  Merchant's  Magazine,  October,  1868,  p.  245. 
^Commercial  and  Financial  Chronicle,  February  24,  1872. 


176  BULLOCK,  WILLIAMS,  AND  TUCKER 

that  the  net  sum  invested  during  the  period  1850-73  was  $1,300,- 
000,000  in  nominal  value,  representing  an  actual  value  of  perhaps 
$300,000,000  to  $400,000,000  less. 

Against  this  sum  is  chargeable  the  annual  payments  of  interest. 
This  item  can  be  only  roughly  approximated.  In  the  early  fifties, 
on  about  $220,000,000  of  foreign  capital,  interest  at  6  per  cent 
amounted  to  $13,200,000  a  year.  By  1855,  when  the  total  of  foreign 
capital  was  estimated  at  $364,000,000,^  it  may  have  been  about 
$22,000,000;  and  in  i860  on  foreign  capital  of  $400,000,000,  it  was 
about  $24,000,000.  When  foreign  securities  were  returned  in  1861- 
63  it  must  have  sunk  to  $10,000,000.  In  1869,  Wells  estimated 
interest  at  $88,000,000  ;  and  on  $1,500,000,000  in  the  early  seventies 
it  must  have  been  about  $90,000,000.  These  heavy  payments,  how- 
ever, occurred  only  in  the  last  six  or  eight  years  of  the  period.  For 
the  whole  period  the  total  interest  charges  may  be  estimated  at 
$904,000,000.- 

Other  items  of  the  balance  are  of  minor  importance,  and  data 
are  lacking  regarding  their  amount.  For  the  most  important  one, 
tourists'  expenditures,  some  figures  are  available.  They  were  esti- 
mated at  the  beginning  of  the  period  at  more  than  $15,000,000  a 
year.^  And  in  1869  they  were  estimated  by  David  A.  Wells  at 
$37,000,000    a    year.'*     This    increase,    however,    could    not    have 

'^  H tent's  Merchant's  Magazine,  December,  1857,  p.  664. 

2  This  is  estimated  as  follows.  During  the  eleven  years  1850-1860,  inclusive, 
the  annual  interest  charge  increased  from  about  $13,000,000  to  $24,000,000 
and  averaged  about  $18,500,000.  This  gives  a  total  of  $203,000,000  for  these 
eleven  years.  After  sinking  to  $10,000,000  in  1861  the  annual  charge  increased 
to  $88,000,000  in  i86q,  which  gives  an  average  charge  of  $49,000,000  during 
these  nine  years  and  a  total  of  $441,000,000.  This  figure,  however,  is  excessive 
because  the  bulk  of  the  new  capital  came  here  after  1864.  To  allow  for  this 
fact  we  may  decrease  the  estimate  for  the  period  by  $100,000,000,  thus  reach- 
ing the  figure  of  $341,000,000  for  the  nine  years  ending  in  1S69.  From  1870  to 
1873,  inclusive,  the  annual  charge  averaged  about  $00,000,000,  or  $360,000,000 
for  the  four  years.  The  total  thus  computed  is  $904,000,000  for  the  twenty-four 
years. 

•■'Kettell,  Eighty  Years  Progress,  Vol.  I,  p.  244. 

4 Report  of  Special  Commissioner  of  the  Revenue  (1869),  p.  xxxi.  He 
deducts  $12,000,000  for  the  expenditures  of  foreigners  in  this  country,  reckon- 
ing $1000  apiece  for  both  classes  of  tourists.  The  total  number  of  American 
citizens  returning  from  abroad  in  1850-1873  was  735,000.  The  total  number  of 
aliens  not  immigrants,  i.e.  foreign  tourists  arriving  in  1850-1873,  was  about 
157,000. 


UNITED  STATES  BALANCE  OF  TRADE  177 

occurred  prior  to  or  during  the  war ;  and  for  the  whole  period,  it  is 
probable  that  the  balance  on  this  account  did  not  average  more 
than  $24,000,000  a  year,  which  gives  a  total  of  $576,000,000. 
There  were  some  6,600,000  immigrants  admitted  in  this  period.  .  .  . 

E.    FIFTH  PERIOD,  1874  TO  1895  :  EXCESS  OF  EXPORTS  DEFI- 
NITELY REESTABLISHED  BY  GROWTH  OF  INTEREST  CHARGES 
ON  FOREIGN  INDEBTEDNESS 

.  .  .  The  crisis  of  1873  was  world-wide.  It  began  in  May  with  a 
panic  in  Vienna,  extended  to  Germany  and  England,  and  in  Sep- 
tember broke  out  in  New  York.  European  lending  ceased,  railroad 
construction  was  halted,  prices  fell  to  a  point  where  imports  must 
diminish  and  exports  expand.  In  1874,  for  the  first  time  since  1862, 
exports  exceeded  imports.^  Before  1874  the  balance  of  trade  had 
been  generally  unfavorable  ;  from  that  year  on,  the  balance  has  been 
favorable  except  in  three  years,  1875,  1888,  arid  1893.^  The  year 
thus  marks  a  turning  point  in  our  foreign  trade. 

The  table  on  page  178  shows  the  annual  trade  balances  for  the 
period  1874-95.  Silver  is  included  with  merchandise;  the  gold 
balance  is  stated  separately. 

Before  examining  the  balances  for  the  whole  period,  attention  is 
called  to  the  late  seventies  and  early  eighties.  The  first  column 
shows  an  extraordinary  expansion  of  the  exports.  From  1875  to 
1881  exports  expanded  $353,505,000,  or  63  per  cent.  For  the  six 
years  1876-81  the  excess  of  exports  over  imports  totaled  $1,234,- 
406,000  and  averaged  $205,734,000.  The  total  excess  was  about 
one-half  of  the  total  for  the  entire  period  1874-95,  and  the  average 
almost  three  times  that  of  the  other  sixteen  years.^ 

1  (These  figures  are  for  merchandise  only.) 

Exports  Imports                                Balance 

1873 $522,480,000  $642,136,000  —    $119,656,000 

1874 586,283,000  567,406,000  +         18,877,000 

-Excluding  silver,  the  balance  was  also  unfavorable  in  1889,  by  $2,730,277 

^  Total  excess  of  exports  1874-1895 $2,492,751,000 

Total  excess  of  exports  1876-T881 1,234,406,000 

Total  excess  of  exports  for  the  other  16  yrs 1,258,345,000 

Average  excess  of  exports  1874-1895 113,307,000 

Average  excess  of  exports  1 876-1881 205,734,000 

Average  excess  of  exports  for  the  other  16  yrs.     .     .     .  78,647,000 


178 


BULLOCK,  \VILLL\AIS,  AND  TUCKER 


UNITED   STATES   BALANCE  OF  TRADE,  1874-95 
(Units  of  $1,000,000) 


Exports  * 

Imports* 

Balance 

Net  Movement  of  Gold 

Fiscal 

Years  t 

Excess  of 
.   exports  (  +  ) 

Excess  of 
imports  (-) 

Excess  o£ 
exports  (  ) 

Excess  of 
imports  (-) 

1874 
1875 
1S76 

1877 
1878 

1879 
iSSo 
1881 
1882 
1S83 
1884 
1885 
1 886 
1SS7 
1SS8 
18S9 
1890 
1891 
1892 

1S93 
1S94 

1895 

619 

539 
566 
632 
719 

731 
849 
919 

767 

844 
767 

776 
709 

74^ 
724 

779 
S93 
907 
1063 
888 
943 
855 

576 
540 
469 
466 

454 
460 
680 

653 
733 
734- 
682 

594 

710 

739 
764 
810 
863 

847 
890 
668 
752 

43 

97 
166 
266 
270 
169 
266 

35 
no 

84 

182 

55 

33 

15 
82 

44 
216 

274 
103 

2 
I 

14-5 

53-3 
23.2 

'J 

1S.3 

49-7 

4-3 
68.1 

•5 

87-5 

4-5 
30.1 

4.1 
I.O 

77-1 

97-5 
1.8 
6.1 

1S.2 

33-2 
24.6 

Total 

17231 

14738 

2493  Net  Exports 

II  1.9  Net  Exports 

Yearly 
Average 

783 

670 

113  Net  Exports 

5.1  Net  Exports 

*  These  figures  include  exports  and  imports  of  silver, 
t  July  I  to  June  30. 

These  large  balances  were  due  mainly  to  the  unprecedented  "expan- 
sion of  agricultural  exports,  which  at  that  period  comprised  from 
three-fourths  to  four-fifths  of  the  total.  The  expansion  was  particu- 
larly marked  in  1880  and  1881.  In  the  summer  of  1879  harvest 
failures  in  Europe,  together  with  good  crops  at  home,  enabled  our 
farmers  to  export  unprecedented  quantities  of  breadstuffs  and  other 
products  at  high  prices.  Exports  of  wheat  and  wheat  flour  increased 
162  per  cent  from  1875  to  1881  ;  exports  of  meat  and  meat  products 


UNITED  STATES  BALANCE  OF  TRADE  179 

doubled ;  exports  of  cotton  increased  30  per  cent ;  agricultural 
exports  as  a  whole  about  doubled.^ 

These  heavy  exports  induced  a  large  net  inflow  of  gold,  totaling 
$183,544,000  from  1878  to  1884.  Of  this,  $174,585,000  came  in 
1880  and  1 88 1,  the  years  when  exports  reached  their  highest  level 
prior  to  1890.  The  gold  imports  insured  the  successful  maintenance 
of  specie  payments,  resumed  in  1879.  Coming  in  such  a  heavy 
stream  into  a  gold-producing  country,  normally  an  exporter  of 
gold,  they  indicate  beyond  question  that  in  the  years  when  exports 
were  largest  and  the  trade  balance  most  favorable,  1879-81,  the 
United  States  had  a  surplus  of  credits  on  all  international  transac- 
tions. The  demand  for  our  exports,  combined  with  new  capital 
borrowings  in  this  period,  was  so  large  as  more  than  to  offset  the 
total  outgoings  for  imports  plus  invisible  items  of  indebtedness. 

These  years  were  of  course  exceptional.  In  general,  the  more  mod- 
est favorable  balances  characteristic  of  the  period  1874-95  served 
for  the  payment  of  our  indebtedness  on  the  various  invisible  items 
of  international  exchange.  Summing  up  the  figures  of  merchandise 
trade  for  the  period,  exports  amounted  to  $17,231,064,000,  as  against 
$14,738,313,000  of  imports,  leaving  an  excess  of  exports  of  $2,492,- 
751,000,  or  an  average  excess  of  $113,307,000,  merchandise  and 
silver.  The  normal  flow  of  gold  was  outward,  but  moderate ;  the 
total  excess  of  exports  being  $111,903,000,  or  an  average  of  $5,087,- 
000  a  year.  The  total  excess  of  exports  of  merchandise  and  specie 
was  $2,604,654,000,  an  average  of  $118,394,000  a  year.  It  is  this 
amount,  plus  new  foreign  capital  invested  in  this  period,  against 
which  the  items  of  invisible  indebtedness  are  chargeable. 

The  chief  item  of  indebtedness  was  the  payment  of  interest 
charges  on  foreign  capital.  To  approximate  the  amount  of  these 
payments  we  must  follow  the  course  of  the  investment  account,  as 
indicated  by  international  financial  conditions,  by  the  cyclical  move- 
ment of  business,  and  by  such  statistical  estimates  as  appear  reliable. 
The  Commercial  and  Financial  Chronicle  of  May  18,  1872,  estimated 

(In  thousands  of  dollars) 
1875  1881  Increase 

^  Exports  of  wheat  and  wheat  flour 82,320     212,746     130,426 

Exports  of  meat  and  meat  products 67,955     i34'254       66,299 

Exports  of  cotton 190,639     247,696       57,057 

All  agricultural  exports 389,410     738,124     348,714 


i8o  BULLOCK,  WILLLAMS,  AND  TUCKER 

the  total  of  American  securities  held  in  Europe  to  be  $1,500,- 
000,000.  This  estimate  agrees  with  that  of  David  A.  Wells,  and 
may  be  taken  as  an  approximately  accurate  statement  of  the  foreign 
investments  at  the  time  of  the  panic  of  1873.  During  the  period  of 
depression  succeeding  the  crisis,  there  was  a  considerable  return  of 
securities  from  Europe,  the  withdrawals  amounting  in  1876-78  to 
$300,000,000,  of  which  $150,000,000  pertain  to  the  year  1878.^  In 
1879,  as  already  noted,  occurred  the  revival  and  the  marked  expansion 
of  agricultural  exports.  Prosperity  among  the  farmers  and  the  grain 
carrying  railroads  made  business  brisk  for  merchants  and  manu- 
facturers of  raw  materials.  Railroad  construction  began  afresh, 
28,253  miles  of  new  road  being  built  in  the  three  years  1880-82. 
Though  the  favorable  reaction  was  felt  more  in  the  United  States 
than  in  Europe,  the  railroad  boom  soon  attracted  foreign  capital,- 
as  had  that  preceding  1873.  By  1883  United  States  railroad  securi- 
ties quoted  in  London  amounted  to  $1,535,000,000 ;  ^  adding  federal 
and  state  bonds,  municipal  securities,  land,  mining,  and  industrial 
stocks,  the  total  of  foreign  investments  could  not  have  been  less 
than  $2,000,000,000.  In  the  last  half  of  1881  the  tide  turned.  The 
crops  of  that  year  represented  a  loss  of  two  hundred  million  bushels 
of  wheat,  live  hundred  million  bushels  of  corn,  and  over  a  million 
bales  of  cotton.  The  immoderate  railroad  construction,  the  feature 
of  which  was  the  paralleling  of  old  established  lines,  ended  in  a 
prolonged  period  of  liquidation,  which  reached  its  low  point  in  1884. 
Rate  cutting  and  rate  wars  became  the  distinctive  feature  of  the 
industrial  situation.  From  July,  1882,  to  July,  18S5,  there  was  a 
reversal  of  the  security  movement,  similar  to  that  following  the 
panic  of  1873,  though  much  smaller  in  volume.  From  bankers' 
records,  the  Chronicle  computed  an  average  withdrawal  of  capital  of 
$25,000,000  a  year."*  Statistical  indices  of  the  volume  of  business 
show  1885  to  have  been  the  dullest  year  of  the  decade.  Then  came 
a  revival,  so  prompt  that  the  Chronicle  declared  i886  to  be  the  best 
business  year  since  1880."'    Rapid  railway  construction  began  again, 

^Data  furnished  by  F.  D.  Graham,  Rutgers  College. 
^Sce  C.  K.  Hobson,  The  Export  of  Capital,  p.  147. 

3 Sir  George  Paish,  Trade  Balance  of  the  United  States,  p.   173.   National 
Monetary  Commission,  1010. 

^Commercial  and  Financial  Chronicle,  Vol.  LX,  Part  2,  p.  633. 
5  See  W.  C.  Mitchell,  Business  Cycles,  p.  46. 


UNITED  STATES  BALANCE  OF  TRADE  i8i 

the  annual  increase  of  mileage  rising  from  2,975  miles  in  1885  to 
12,876  in  1887.  This  expansion  in  United  States  railroads  coincided 
with  a  great  wave  of  British  investments.  Following  the  gold  and 
diamond  discoveries  in  South  Africa,  in  1884-85,  there  developed  a 
mining  boom,  and  then  a  whole  series  of  speculative  undertakings  in 
other  countries,  notably  Australia,  Argentina,  and  the  United  States.^ 
England  had  entered  upon  a  period  of  active  prosperity.  Accumu- 
lations of  capital  came  forward  freely  for  investment.  British  pro- 
moters started  a  series  of  new  companies.  Beginning  at  home  with 
the  conversion  of  private  enterprises  into  joint  stock  companies, 
they  soon  undertook  similar  enterprises  in  Germany,  Austria,  Argen- 
tina, and  the  United  States.-  Trust  and  investment  companies  were 
formed  to  underwrite,  and  speculate  in,  the  stocks  of  other  com- 
panies. Large  amounts  of  American  railway  securities  were  placed 
in  England.  Also,  London  caught  the  infection  of  the  American 
''silver  boom,"  and  purchased  large  blocks  of  silver  stock,  in  the 
hope  that  the  Sherman  Silver  Purchase  Act  of  1890  would  enhance 
the  value  of  the  white  metal. 

Then  came  a  sharp  reaction.  Most  heavily  of  all,  British  capital 
had  been  pouring  into  Argentina.  In  November,  1890,  the  Argen- 
tine government  announced  its  inability  to  meet  interest  payments. 
Baring  Brothers,  of  London,  were  forced  to  close  their  doors.  There 
developed  a  critical  situation  in  England,  and  New  York  dealers 
were  daily  receiving  heavy  selling  orders  from  London.  Gold  exports 
were  heavy.  The  New  York  banks  held  less  than  the  legal  25  per- 
cent reserves  in  eleven  out  of  the  twenty  weeks  from  the  middle  of 
August  to  the  end  of  the  year.  Call  loan  rates  rose  frequently  to 
6  per  cent  per  annum,  plus  one-half  per  cent  a  day.  From  January 
to  July,  1 89 1,  sterling  exchange  in  New  York  stood  almost  continu- 
ously at  the  gold  export  point.  By  the  phenomenal  harvests  and 
exports^  of  1892  a  crisis  was  deferred  until  1893. 

From  the  fall  of  1890  to  the  end  of  1896,  the  net  security  move- 
ment was  heavily  against  the  United  States,  the  net  annual  with- 
drawal averaging  $60,000,000,"*  or  a  total  of  about  $300,000,000. 

^C.  K.  Hobson,  The  Export  of  Capital,  pp.  147  et  seq. 

2W.  C.  Mitchell,  Business  Cycles,  p.  47. 

3  Exports  touched  a  new  high-water  mark  in  1S92:  $1,063,088,000. 

■^Commercial  and  Financial  Chronicle,  Vol.  LX,  Part  2,  p.  632. 


1 82  BULLOCK,  WILLIAMS,  AND  TUCKER 

With  foreign  capital  at  about  $2,000,000,000  in  1883,  a  figure  re- 
duced by  about  Sioo,ooo,ooo  by  the  end  of  1885,  the  heavy  inflow 
of  the  late  eighties  must  have  brought  the  total  to  almost  $3,000,- 
000,000.  Allowing  for  the  later  withdrawals,  the  amount  of  foreign 
investments  in  1895,  the  end  of  our  period,  was  about  $2,500,000,000. 
That  a  smaller  figure  is  out  of  the  question  is  shown  by  the  careful 
investigation  of  N.  T.  Bacon  for  the  year  1899.^ 

From  the  figures  given  for  foreign  capital  we  may  estimate  the 
interest  payments.  The  rate  of  interest  decreased  from  6  to  about 
4  per  cent  as  the  years  passed.  Wells'  estimate  of  the  interest  charge 
for  1869  was  $80,000,000.  By  1878,  in  consequence  of  the  with- 
drawals of  capital,  the  interest  had  fallen  to  not  more  than  $60,000,- 
000 ;  by  1883  it  had  risen  to  over  $80,000,000 ;  in  1890  it  may  have 
been  $110,000,000.  Several  estimates  of  the  interest  charge  were 
made  in  1895;  they  range  from  $90,000,000  to  $100,000,000.  The 
most  careful  investigation  is  that  of  the  Journal  of  Commerce,  which 
puts  the  interest  charge  at  $90,000,000.-  For  the  whole  period, 
1874-95,  the  average  interest  charge  thus  appears  to  have  been 
about  $85,000,000  a  year,  or  a  total  of  $1,870,000,000.  If  we  deduct 
$1,000,000,000  of  new  foreign  investments  made  within  the  period, 
the  net  outgoings  on  account  of  foreign  investments  were  $870,000,- 
000,  or  an  average  of  about  $39,500,000  a  year. 

The  excess  of  the  annual  interest  charge  over  new  annual  invest- 
ments is  the  chief  item  of  "invisible"  indebtedness  which  was  an- 
nually paid  off  by  the  excess  of  merchandise  exports.  The  other 
items  now  require  consideration. 

Our  foreign  merchant  marine  showed  a  continual  decline  during 
the  period,  so  that  imports  brought  in  foreign  vessels  exceeded  ex- 
ports carried  in  American  ships  by  $8,759,703,000.  The  freight 
charge  upon  this  sum  constitutes  the  net  amount  payable  by  America 
for  the  use  of  foreign  ocean  carriers.  Estimates  vary  as  to  the  pro- 
portion which  freight  charges  bear  to  the  value  of  cargo.    Bates ^  puts 

^  Yale  Review,  November,  iqoo,  pp.  265-285. 

-New  York  Journal  of  Commerce  and  Commercial  Bulletin,  July  8,  1895. 
See  too  the  Commercial  Year  Book,  1896,  pp.  225  et  seq. ;  Commercial  and 
Financial  Chronicle,  Vol.  LX,  Part  2,  p.  770;  and  A.  S.  Heidelbach  in  the 
Forum,  February,  1895,  p.  647. 

•' W.  VV.  Bates,  American  Marine;  The  Shipping  Question  in  History  and 
Politics  (1893),  p.  20. 


UNITED  STATES  BALANCE  OF  TRADE  183 

the  percentage  at  15  per  cent  in  the  case  of  exports  and  10  per  cent 
for  imports.  Coming  from  a  former  United  States  Commissioner  of  • 
Navigation  and  a  former  manager  of  the  Inland  Lloyd's  Register, 
this  statement  is  entitled  to  careful  consideration.  Using  Bates' 
figures,  we  should  have  for  the  whole  period  $1,107,193,000  as  the 
earnings  of  foreign  vessels  in  the  import  trade,  and  $346,834,200 
as  the  earnings  of  American  vessels  in  the  export  trade,^  or  a  net 
debit  on  freight  account  of  $760,359,000,  which  represents  a  yearly- 
average  of  about  $34,562,000.  It  is  probable,  however,  that  this 
figure  should  be  considerably  reduced.  In  the  first  place,  it  makes  no 
allowance  for  expenses  of  foreign  vessels  in  American  ports.  More- 
over, the  percentages  of  10  per  cent  and  15  per  cent,  though  prob- 
ably correct  for  earlier  periods,  take  no  account  of  the  very  marked 
reduction  in  ocean  freight  rates  after  1870.  C.  K.  Hobson's  freight 
index-  for  Great  Britain  shows  a  decline  from  248.2  in  1873  to 
88.2  in  1896.  In  other  words,  freight  rates  to  and  from  Great 
Britain  declined  about  64  per  cent.  The  British  Board  of  Trade 
index,  begun  in  1884,  shows  a  decline  from  116.2  in  1884  to  75.3  in 
1895.  The  New  York  to  Liverpool  wheat  rate  decreased  from 
eight  and  seven-sixteenths  pence  in  1875  to  two  and  nine-sixteenths 
pence  in  1895,  a  decrease  of  61  per  cent.^  The  average  export  price 
of  wheat  in  New  York  in  1896  was  $.65  per  bushel.  The  percentage 
of  the  ocean  freight  rate  to  the  value  was  thus  7.7  per  cent.  For 
cargoes  combining  small  bulk  with  high  value  the  rate  would  be  less. 
In  view  of  this  striking  decrease  in  rates,  the  statement  that 
freight  costs  equaled  10  per  cent  and  15  per  cent  of  the  value  of  im- 
ports and  exports  respectively,  if  acceptable  for  the  early  seventies, 

1  Exports  in  American  ships,  1874-1895,  were  $2,312,228,000;  imports  in 
foreign  ships  were  $11,071,930,000. 

2See  "The  Export  of  Capital,"  p.  1S2.  Hobson  has  constructed  for  the  period 
1870-1912,  for  Great  Britain,  an  index  of  outward  freights,  an  index  of  in- 
ward freights,  and  from  these  two  a  mean  index.  The  outward  index  is  based  on 
six  quotations  for  each  of  twenty-two  selected  routes.  The  inward  index  is  the 
mean  between  wheat  rates  on  four  different  ocean  routes :  three  of  these  rates 
are  averages  of  six  rates  in  each  year  ;  the  fourth  is  the  New  York  to  Liverpool 
rate,  given  in  the  Statistical  Abstract  of  the  United  States.  The  other  data  are 
from  Mitchell's  Marine  Register  and  Lloyd's  Shipping  Gazette.  Hobson's 
"inward"  index  shows  a  decline  from  329  in  1873  to  78.5  in  1895 ;  the  outward 
index  declines  from  167.3  in  i873  to  98  in  1896. 

2  Statistical  Abstract  of  the  United  States,  1916,  p.  318. 


l84  BULLOCK.  WILLL\MS,  AND  TUCKER 

appears  too  high  for  the  nineties,  in  this  computation  of  the 
'  United  States  balance  of  payments  for  the  fiscal  years  1908-09,  Sir 
George  Paish  estimated  that,  on  $1,000,000,000  excess  of  imports  in 
foreign  vessels  over  exports  in  American  vessels,  the  net  amount  of 
freight  payable  by  the  United  States,  after  allowing  for  port  ex- 
penses, was  $25,000,000,  or  2.5  per  cent  of  the  value  carried.  A 
computation  made  in  1895  by  the  New  York  Journal  of  Commerce, 
based  on  ocean  rates  for  sixteen  imported  commodities,  showed  the 
average  ratio  of  freight  to  value  of  goods  to  be  3.6  per  cent.^ 

From  the  evidence  given,  it  is  estimated  that  the  ratio  of  freight 
charges  to  value  of  goods  carried  during  the  period  1874-95  de- 
creased from  about  12  to  about  5  per  cent,  and  for  the  whole  period 
averaged  8  per  cent.  On  this  basis  the  balance  owed  on  account  of 
freight  charges  would  amount  to  $700,776,000,  or  an  average  of 
$31,854,000.  Deducting  one-fifth  for  expenses  in  port,  a  heavy  item 
which  has  been  estimated  as  high  as  one-third  of  gross  freight 
earnings,"  we  obtain  for  the  gains  of  American  vessels  $148,000,000; 
for  those  of  foreign  vessels  $708,000,000 ;  making  a  net  indebtedness 
of  $560,000,000,  or  $25,500,000  a  year. 

A  third  invisible  item  of  indebtedness  was  the  expenditure  of 
American  tourists  abroad.  At  the  beginning  of  the  period  such 
expenditures  were  estimated  at  $37,000,000.  For  the  year  1894,  we 
have  the  computation  of  the  New  York  Journal  of  Commerce.  This 
computation,  which  is  based  on  an  examination  of  actual  records  of 
letters  of  credit  issued  in  New  York  and  other  cities,  shows  the 
following  results : 

TRAVELERS'  CREDITS.  1894 

Letters  of  credit  issued  per  annum  by  big  New  York  issuers  .     .  $55,000,000 

Minor  issues  in  New  York 2,000.000 

Issued  directly  in  other  cities 3,000,000 

Year's  total  for  United  States,  about 560,000.000 

Average  of  credits  issued  and  not  used 22  per  cent 

Net  amount  transferred  to  other  countries,  about  ....  ,«47,ooo,ooo 

'New  York  Journal  of  Commerce  and  Commercial  Bulletin,  July  8,  1805; 
for  the  year  1892  it  computes  the  net  indebtedness  of  the  United  States  on 
freight  account,  without  deducting  port  expenses,  as  $22,877,00. 

-Ibid.    See,  too,  C.  K.  Hobson,  The  Export  of  Capital,  p.  177. 


UNITED  STATES  BALANCE  OF  TRADE  185 

These  figures  would  be  somewhat  reduced  by  European  letters  of 
credit  expended  in  America.  As  an  average  for  the  whole  period,  the 
net  tourists'  expenditures  probably  did  not  exceed  .$35,000,000  a  year. 
These  were  the  chief  items  of  indebtedness.  For  immigrants' 
remittances,  an  item  which  in  the  last  period  before  the  Great  War 
came  to  occupy  a  position  of  major  importance,  there  are  few  data 
available.  It  is  probable  that  they  were  not  very  large  prior  to  the 
late  nineties.  The  number  of  immigrants  in  the  period  1901-10 
was  about  as  large  as  that  from  1881  to  1900.  Moreover,  the  immi- 
grants were  mainly  from  northern  Europe  in  the  earlier  period ;  and 
such  computations  as  have  been  made  show  that  the  great  bulk  of 
immigrants'  remittances  comes  from  the  Italians  and  others  from 
southern  Europe.  International  money  orders  issued  in  the  United 
States,  which  are  sometimes  used  as  a  rough  guide  in  estimating 
immigrants'  remittances,  did  not  exceed  $10,000,000  a  year  prior 
to  1888,  and  for  most  years  averaged  $6,000,000  to  $7,000,000.^ 
For  immigrants'  remittances,  and  other  miscellaneous  items  of  debit, 

we  may  allow  an  average  sum  of  $20,000,000  a  year. 

*********** 
As  a  picture  of  our  international  situation  at  the  end  of  the  period, 
we  present  a  balance  of  payments  for  the  year  1894,  the  year  for 
which  the  most  complete  and  reliable  estimates  are  available: 

THE  BALANCE  OF  INTERNATIONAL  PAYMENTS  OF  THE 
UNITED   STATES,  1894* 

(Units  of  $i,ooo) 
Credit 

1.  Exports  t •     •      •  $942,591 

2.  Exports  of  gold 76,978 

3.  New  capital  borrowings nil 

$1,019,569 
Debit 

1.  Imports  t $668,281 

2.  Imports  of  gold 7^,449 

3.  Securities  returned  from  Europe 60,000 

4.  Interest  payments 95,°°° 

5.  Net  freight  payments -2,877 

6.  Tourists'  expenditures 47,°°° 

7.  Immigrants'  remittances  and  other  items  ....       4°,°°° 

$1,005,607 
*  Fiscal  year,  July  i,  1893-June  30,  1894.         t  Merchandise  and  silver. 
1  Statistical  Abstract  of  the  United  States,  1916,  p.  726. 


1 86  BULLOCK,  WILLIAMS,  AND  TUCKER 

F.    SIXTH  PERIOD,    1896   TO    1914:    EXCESS   OF   EXPORTS 
INCREASED   BY  TOURISTS'   EXPENDITURES   AND   IMMI- 
GRANTS' REMITTANCES 

During  the  last  period  prior  to  the  Great  War  the  balance  of 
international  payments  w^s,  in  its  essential  characteristics,  similar 
to  that  of  the  period  just  reviewed.  The  main  difference  was  that 
the  "favorable"  trade  balance  was  larger;  the  average  excess  of 
exports,  which  in  the  earlier  period  was  about  $113,000,000,  became 
for  the  later  period  about  $487,000,000.  This  increase  was  due  in 
some  measure  to  the  increase  in  the  annual  interest  charge  on  foreign 
capital ;  to  a  greater  extent  it  was  due  to  the  extraordinary  growth 
of  tourists'  expenditures  and  immigrants'  remittances. 

The  following  table  shows  the  annual  balance  of  merchandise 
trade  and  the  net  annual  gold  movement  for  the  period. 

The  table  shows  for  the  whole  period  exports  of  $32,182,126,000 
and  imports  of  $22,866,028,000,  leaving  a  favorable  trade  balance  of 
$9,262,098,000,  or  an  average  of  $487,479,000  a  year.  The  most 
notable  fact,  as  regards  merchandise  and  silver,  is  the  extraordinary 
growth  of  the  balance  in  the  late  nineties.  From  $134,647,000  in 
1896,  a  balance  about  $13,000,000  larger  than  that  of  the  average 
of  the  preceding  twenty- two  years  and  about  $32,000,000  larger 
than  that  of  the  preceding  year,  the  balance  increased  to  about 
$640,000,000  in  1898.  This  balance  was  exceeded,  prior  to  the  war, 
only  by  those  of  1901,  1908,  and  1913  ;  it  was  due  in  part  to  a 
diminution  of  imports,  byt  mainly  to  the  marked  and  sudden  ex- 
pansion of  exports.  Exports  increased  from  about  $943,000,000  in 
1896  to  about  $1,287,000,000  in  1898,  and  by  1901  had  reached 
$1,552,000,000. 

The  late  nineties  mark  a  change  in  the  character  of  our  exports. 
In  foreign  trade,  the  year  1895  was  the  low-water  mark  of  the  depres- 
sion following  the  panic  of  1893.  In  1896  there  was  an  increase 
of  about  $83,000,000  in  exports  and  of  about  $48,000,000  in  imports, 
despite  the  fact  that,  in  general  business,  conditions  were  almost 
as  depressed  as  in  1894.  In  July,  1897,  the  trend  of  prices,  down- 
ward after  1873,  reached  its  lowest  point.  The  increase  in  exports 
in  1896  was  mainly  in  manufactures;  it  was  the  beginning  of  an 
extraordinary   expansion   in   this   branch   of   exports.    Wages  were 


UNITED  STATES  BALANCE  OF  TRADE 


187 


UNITED   STATES    liALANCE  OF   TRADE,  1896-1914 
(Units  of  $1,000,000) 


Fiscal 

Years  t 

Exports  * 

Imtorts* 

Balance 

Net  Movement  of  Gold 

Excess  of 
exports  (+) 

Excess  of 
imports  (— ) 

Excess  of 
exports  (  +  ) 

Excess  of 

imports  (— ) 

1896 
1897 
1898 
1899 
1900 
I90I 
1902 

1903 
1904 

1905 
1906 
1907 
1908 
1909 
I910 
I91I 
I912 

I913 
I914 

943 
1113 

12S7 
12S3 

1451 
155- 
1431 
1464 
1510 
1567 
1810 

1938 
1919 
1719 
1800 
2114 
2269 

2537 
2420 

809 

795 

647 

728 
885 
860 
932 

1050 
IOI9 

II45 
I27I 

1477 
1239 
1356 

1602 

1573 

1700 

1854 

1924 

135 
318 
640 
556 
566 
692 
500 

415 
491 
422 

539 

460 
680 

363 
198 

541 
569 
683 

495 

78.9 

3-7 

2.1 

38.9 

47-5 
75-- 

8.4 
8.6 

45-5 

44-7 

105.0 

51.4 

12.9 

3-5 
17.6 

57-6 
63.1 

75-9 
51-1 

Total 

32128 

22866 

9262  Net  Exports 

173.9  Net  Exports 

Yearly 
Average 

1691 

1203 

487  Net  Exports 

9.2  Net  Exports 

*  These  figures  include  exports  and  imports  of  silve 
t  July  I  to  June  30. 

low  and  material  abundant,  but  the  depression  of  prices  after  1893 
and  the  sluggishness  of  the  home  market  had  caused  stocks  to 
pile  up.  This  was  a  condition  ideal  for  export.  We  began  to  sell 
manufactured  products  not  merely  in  the  neutral  markets  but  in 
Continental  Europe.  Exports  of  manufactures  increased  from  $206,- 
000,000  in  1895  to  $258,000,000  in  1896.  Exports  of  iron  and  steel 
goods  increased  28  per  cent.  Then  in  1897  began  an  enormous  out- 
burst of  exports,  to  which  both  manufacturers  and  agricultural  prod- 
ucts contributed.    In  November,  1896,  the  Indian  wheat  crop  failed. 


1 88  BULLOCK,  \VILLL\MS,  AND  TUCKER 

In  1897  the  European  wheat  crop  fell  short  of  1896  by  350,000,000 
bushels — a  loss  of  30  per  cent,^  while  the  crop  in  the  United  States 
ran  103,000,000  bushels  ahead  of  1896.  Exports  of  wheat  and 
wheat  flour  increased  from  $92,000,000  in  1896  to  $116,000,000  in 
1897,  and  reached  their  high  point  in  1898,  at  $215,000,000.-  Even 
more  extraordinary  was  the  expansion  of  exports  of  manufactures. 
From  $258,000,000  in  1896  they  increased  to  $311,000,000  in  1897, 
$324,528,000  in  1898,  $380,000,000  in  1899,  and  $485,022,000  in 
1900.^  In  1892,  manufactures  constituted  18  per  cent  of  total 
exports,  in  1895  25  per  cent,  in  1900  35  per  cent.*  Exports  of  iron 
and  steel  products  rose  from  $32,000,000  in  1895  to  $122,000,000 
in  1900.'''  It  was  at  this  time,  and  because  of  our  exports  of  manu- 
factures, that  there  arose  in  Europe  the  agitation  against  the 
"American  invasion." 

In  the  late  nineties  the  United  States  balance  of  international 
payments  was  truly  "  favorable."  The  situation  was  strikingly 
parallel  to  that  of  1879-81,  already  reviewed.  In  both  cases,  our 
exports  were  so  large  as  to  more  than  equal  the  total  of  indebtedness 
on  account  of  the  imports  plus  the  invisible  items  of  the  balance. 
No  other  explanation  can  account  for  the  very  large  and  continuous 
net  inflow  of  gold,  sustained  over  several  years,  which  occurred  in 
these  periods.  The  table  on  page  228  shows  a  heavy  net  gold  import 
in  1897,  1898,  and  1899,  amounting  in  all  to  $201,072,000.  As  in 
the  earlier  period  the  large  imports  of  gold  made  possible  the  resump- 
tion of  specie  payments,  so  these  gold  imports  of  the  late  nineties 
insured  the  success  of  the  Gold  Standard  Act  in  1900.  This  act, 
besides  requiring  the  establishment  of  a  fund  of  $150,000,000  of 
gold  to  insure  redemption  of  the  notes  of  the  government,  created  a 
new  demand  for  cash  reserves  by  the  facilities  which  it  gave  for  the 
establishment  of  new  national  banks.  The  increase  of  government 
paper  money,  except  certiflcates  against  deposited  gold  or  silver, 
having  been  stoj^ped  in  1893  by  the  repeal  of  the  Silver  Purchase 
Act,  the  new  demand  for  reserve  money  was  largely  dependent  on 
imported  gold." 

1  Year-book  for  1808,  U.S.  Department  of  Agriculture,  p.  686. 

2  Statistical  Abstract  of  the  United  States,  1Q16,  p.  685. 
^Ibid.  p.  695.  •'Ibid.  "Ibid.  p.   713, 
"See  A.  D.  Noycs,  Forty  Years  of  American  Finance,  p.  272, 


UNITED  STATES  BALANCE  OF  TRADE  189 

In  general,  the  gold  movement  in  the  period  1896-1914  was 
erratic,  years  of  net  gold  imports  alternating  with  years  of  net  gold 
exports.  In  almost  every  instance,  the  inward  movement  occurred 
in  years  when  merchandise  exports  were  unusually  large.  This  was 
notably  the  case  in  1906-08,  and  again  in  191 1.  The  total  for  the 
whole  period  shows  that  the  United  States  not  only  retained  the 
annual  product  of  its  mines,  amounting  to  $1,574,499,000,^  but  had 
a  net  import  of  $173,902,000.  This  large  increase  of  our  gold  supply 
was,  in  the  opinion  of  most  economists,  a  major  cause  of  the  rising 
trend  of  prices  after  1896. 

To  sum  up  the  account  of  merchandise  and  specie,  this  period 
began  with  an  extraordinary  expansion  of  exports,  raising  the  bal- 
ance of  trade  to  a  new  level,  which  has  since  been  pretty  consistently 
maintained.  For  the  whole  period  the  net  excess  of  exports  of 
merchandise  and  specie  was  $9,088,196,000,  or  an  annual  average 
of  $478,326,000.  Against  this  amount  are  to  be  charged  the  invisible 
items.  As  has  been  said,  the  main  features  of  our  balance  of  pay- 
ments on  its  debit  side  were  first,  the  increase  of  the  annual  interest 
charge,  and  second  —  and  most  important  for  this  period — the 
striking  growth  of  tourists'  expenditures  and  immigrants'  remit- 
tances. Since  for  all  of  these  items  more  and  better  data  are  avail- 
able for  this  period  than  for  those  preceding,  a  narrative  of  the 
course  of  investment  and  of  other  international  currents  is  less 
necessary.  We  may  confine  ourselves  to  a  summary  analysis  of 
the  data  at  hand. 

In  1899,  Mr.  N.  T.  Bacon"  made  a  first  hand  study  of  foreign 
investments  in  the  United  States.  His  investigation  was  made  in 
New  York,  London,  Paris,  Amsterdam,  Frankfurt,  and  other  cities, 
and  with  the  aid  of  J.  P.  Morgan  &  Co.  and  other  bankers  on  this 
side,  and  of  leading  European  financiers.  Mr.  Bacon  found  that 
the  vast  mass  of  foreign  investments  was  in  railroad  securities. 
Foreigners  had  virtually  none  of  our  industrial  securities,  or  of  our 
state,  county,  or  municipal  bonds.  Only  infinitesimal  amounts  of 
the  capital  of  our  national  and  state  banks  were  owned  abroad, 
except  as  held  by  Americans  resident  in  Europe.  The  amount  of 
foreign  capital  in  real  estate  mortgages  was  also  small.    Prior  to 

1  Statistical  Abstract  of  the  United  States,  1916,  p.  711. 
-  Yale  Review,  November,  1900,  pp.  265-285. 


1 90  BULLOCK,  WILLL^MS,  AND  TUCKER 

1893  there  had  been  large  investments  of  this  nature,  made  chiefly 
through  the  Lombard  Investment  Company  and  similar  corporations, 
but  during  the  panic  of  1893  many  of  these  companies  were  forced 
into  liquidation  by  the  marked  shrinkage  in  the  value  of  farm  lands, 
and  British  capital  in  real  estate  was  mostly  withdrawn.  There  were 
also  considerable  sales  of  Dutch  real  estate  holdings.  Mr.  Bacon's 
summary  statement  of  our  foreign  indebtedness  on  investment  ac- 
count, as  of  January  i,  1899,  is  as  follows:^ 

Cr.  Dr. 

To  Great  Britain $2,500,000,000 

To  Holland 240,000,000 

To  Germany 200,000,000 

To  rest  of  Europe 160,000,000 

To  Cuba 30,000,000 

To  rest  of  America  and  China 15,000,000 

To  life  insurance 185,000,000 

From  Europe $10,000,000 

From  Canada 150,000,000 

From  Mexico 185,000.000 

From  Cuba 50.000,000 

From  rest  of  America 55,000,000 

From  Pacific,  China,  and  Japan      ....  5,000,000 

From  life  insurance  guarantee  investments   .  45,000,000 

Totals $500,000,000     $3,330,000,000 

Net  indebtedness 2,830,000,000 

Foreign  investments  in  the  United  States  amounted  to  $3,330,- 
000,000  and  American  investments  abroad  to  $500,000,000,  leaving 
a  net  indebtedness  of  $2,830,000,000.  American  investments  abroad 
were  insignificant  until  the  late  nineties.  In  1900,  the  year  after 
Mr.  Bacon's  investigation  was  made,  there  was  a  marked  influx  of 
English,  Swedish,  and  German  loans.  From  July  to  November  they 
amounted  to  $60,000,000;-  in  the  twelve  months  after  March  1900, 
to  no  less  than  $118,000,000.  It  is  probable,  however,  that  even  in 
this  year  the  net  capital  movement  was  toward  the  United  States, 
rather  than  away  from  it. 

1  Yale  Revie'oJ,  November,  1900,  p.  276. 
2 Ibid.  p.  285. 


UNITED  STATES  BALANCE  OF  TRADE  "    191 

Later  investigations  leave  no  doubt  that  for  the  whole  period 
1 896-1 9 14  the  net  flow  of  capital  investment  was  decidedly  into 
the  United  States.  At  the  end  of  1908  -the  securities  of  American 
railways  quoted  in  the  London  Stock  Exchange  ''official  list"  were 
of  the  nominal  value  of  $7,500,000,000.  Besides  these  there  were 
a  large  number  of  American  industrial  and  other  securities  quoted 
in  London  which  brought  the  total  to  over  $9,000,000,000.^  Of  this 
vast  amount  only  a  portion  was  held  in  Great  Britain.  According  to 
Sir  George  Paish  in  his  study  for  the  United  States  National  Monetary 
Commission  of  1910,  Great  Britain  possessed  about  $3,500,000,000 
of  American  securities,  Germany  $750,000,000,  Holland  $750,000,- 
000,  and  France  $500,000,000.  In  the  aggregate,  he  puts  the 
amount  of  European  capital  invested  in  permanent  securities  in  the 
United  States  at  approximately  $6,000,000,000.^  To  this  is  added 
the  floating  loans  made  by  Europe  to  America.  These  loans  are 
made  chiefly  in  the  spring  and  summer  months  in  anticipation  of 
the  exports  of  produce  in  the  fall  months,  when  they  are  largely 
paid  off.  Paish  estimated  the  amount  of  this  floating  debt,  in  the 
form  of  produce  bills,  finance  bills,  loans  against  securities,  over- 
drafts, and  the  like,  at  about  $400,000,000,  on  the  average ; 
and  stated  the  total  amount  of  capital  borrowed  by  the  United 
States,  including  both  fixed  investments  and  floating  loans,  as 
$6,500,000,000. 

Since  the  outbreak  of  the  Great  War  there  have  been  various 
estimates,  by  our  leading  financiers  and  financial  journals,  of  the 
amount  of  American  securities  held  abroad  in  1914.  On  the  basis 
of  a  compilation  by  Dow,  Jones  &  Co.  from  the  returns  of  114 
corporations  in  the  United  States,  the  total  foreign  investment  was 
estimated  to  be  in  excess  of  $5,000,000,000,^  of  which  European 

^Sir  George  Paish,  Trade  Balance  of  the  United  States,  p.  174.  National 
Monetary  Commission,  1910. 

2  Ibid.  p.  175. 

^  Bradstr eel's,  October  24,  1914,  p.  690.  Cf.  the  Statist,  January  8,  1916, 
pp.  61,  62,  where  British  investments  in  the  United  States  are  given  as  follows: 

Railroad  securities £618,000,000 

Other  investments £145,000,000 

£763,000,000 


192  BULLOCK,  WILLIAMS,  AND  TUCKER 

holdings  of  railroad  securities  constituted  $4,000,000,000.  All  of 
the  estimates  that  have  been  given  put  the  total  at  $4,000,000,000 
to  $5,000,000,000/  In  the  absence  of  any  evidence  as  to  large 
withdrawals  of  capital  since  1908,  it  is  probable  that  Paish's 
estimate  is  an  overstatement ;  and  that  for  the  whole  period 
1 896-19 14,  foreign  capital  in  the  United  States  increased  from 
about  $2,500,000,000  to  about  $4,500,000,000.  Against  this  is 
to  be  placed  American  capital  invested  abroad,  which  was  put  by 
N.  T.  Bacon-  at  $500,000,000  in  1899  and  by  Sir  George  Paish-'' 
at  $1,500,000,000  in  1908.  For  the  whole  period  it  is  probable 
that  the  inward  flow  of  capital  amounted  to  about  $2,000,000,000, 
and  the  outward  flow  to  about  $1,000,000,000,  leaving  a  net  increase 
of  $1,000,000,000. 

Interest  payments  on  foreign  capital  were  estimated  by  Paish  as 
$300,000,000,  in  1908.  In  1900,  with  foreign  investments  of  over 
$3,300,000,000,  as  shown  by  Bacon's  investigation,  interest  pay- 
ments were  probably  not  less  than  $125,000,000.  For  the  whole 
period,  interest  on  foreign  capital  probably  averaged  about  $200,- 
000,000  a  year,  by  conservative  estimate  ;  and  incoming  interest  pay- 
ments on  American  capital  invested  abroad,  which  as  we  have  seen 
increased  to  $1,500,000,000,  probably  averaged  $40,000,000,  leaving 
a  net  annual  outflow  on  interest  account  of  $160,000,000  a  year. 

Even  more  important  than  the  interest  charges  in  this  period  were 
the  expenditures  by  American  tourists  in  foreign  lands  and  the 
remittances  of  savings  to  the  home  countries  by  immigrants.  Tour- 
ists' expenditures  increased  markedly  as  a  consequence  of  the  wave 
of  prosperity  in  the  late  nineties.  The  number  of  American  citizens 
returning  to  the  United  States  from  other  lands  increased  from  93,- 
602  in  1898  to  157,050  in  1901,  167,227  in  1905,  200,447  ^^  1908, 
and  286,604  in  1913.*  From  the  data  obtainable  as  to  the  expendi- 
tures of  these  tourists,  Sir  George  Paish  estimated  that  the  sum 
expended    in    1908    approximated    $1,000    per    person,    giving   an 

1  See,  for  instance,  T.  W.  Lamont,  Boston  Herald,  December  12,  1918. 
-  Yale  Review,  November,  looo,  p.  276. 

^Trade  Balance  of  the  United  States,  p.  176.  National  Monetary  Com- 
mission, IQIO. 

^Statistical  Abstract  of  the  United  States,  1916,  p.  iii. 


UNITED  STATES  BALANCE  OF  TRADE  193 

aggregate  of  $200,000,000.  In  that  year,  the  number  of  European 
tourists  arriving  in  the  United  States,  other  than  those  passing 
through  to  Canada,  was  about  30,000;  at  $1,000  per  person,  their 
expenditures  aggregated  $30,000,000,  leaving  a  net  balance  of  about 
$170,000,000^  a  year  owed  by  the  United  States  to  cover  tourist 
expenditures.  This  sum  does  not  include  the  amounts  expended  for 
works  of  art,  jewelry,  clothing,  and  the  like,  which  are  declared  at 
the  customs  and  are  included  in  the  value  of  the  goods  imported 
into  the  United  States.  That  Paish's  estimate  is  conservative  is 
indicated  by  Bradstreet's  computation  of  1914,  which  takes  the 
moderate  average  expenditure  of  $500  per  person,  and  yet  puts  the 
total  annual  outgo  at  about  $175,000,000.- 

No  less  striking  was  the  growth  of  immigrants'  remittances.  The 
most  thorough-going  investigation  of  this  item  is  that  of  C.  F. 
Speare^  for  the  year  1907.  It  is  based  on  an  inquiry  among  the 
small  foreign  bankers  through  whom  remittances  of  this  sort  are 
chiefly  made,  and  is  supplemented  by  reference  to  the  amounts  of 
international  postal  orders  annually  issued  by  the  United  States 
post  office.  These  postal  orders  show  a  surprising  increase  after  1900. 
In  1885  they  amounted  to  only  $6,840,000,  in  1895  to  $12,906,000, 
and  in  1900  to  $16,749,000.  By  1907  they  had  reached  $84,080,711, 
and  by  191 1,  $109,604,639.*  These  postal  orders  are  less  im- 
portant as  an  indication  of  the  volume  of  immigrants'  remittances 
than  are  drafts  furnished  by  the  small  native  banker.  Through  him 
goes  the  great  bulk  of  all  money  sent  out  of  the  country  on  this 
account.  In  1908  there  were  over  1,000  Italian  bankers  in  the 
United  States  (about  three  hundred  of  whom  were  in  New  York), 
several  hundred  Hungarian  bankers,  chiefly  in  the  East  and  in  the 
coal  and  iron  regions  of  the  Middle  West,  and  numerous  Russian 
bankers  in  the  New  York  foreign  quarter.  Half  a  dozen  banking 
institutions  in  the  Northwest,  in  Chicago,  and  in  New  York,  handled 
the  largest  part  of  the  remittances  to  Norway  and  Sweden.    All 

iSir    George    Paish,    Trade    Balance    of    the    United    States,    pp.    178-180. 
National  Monetary  Commission,  1910. 

^  Bradstreet\  November  21,  1914,  p.  754- 

'^North  American  Review,  January,  1908,  pp.  106-116. 

^Statistical  Abstract  of  the  United  States,  1916,  p.  726. 


194  BULLOCK,  \VILLL\MS,  AND  TUCKER 

together,  the  amount  forwarded  by  drafts  on  Europe  sold  by  these 
private  concerns  was  in  1907  about  $125,000,000/  In  addition,  the 
express  companies  did  a  large  business,  calculated  at  about  $20,- 
000,000  to  $25,000,000  a  year.  The  total  sum  remitted  to  Europe 
Mr.  Speare  estimated  at  $250,000,000,  distributed  as  follows: 

Italy $70,000,000 

Austria-Hungary 65,000,000 

Great  Britain 25,000,000* 

Norway  and  Sweden 25,000,000 

Russia 25,000,000 

Germany 1 5,000,000 

Greece 5,000,000 

All  others,  including  France,  Switzerland,  Belgium, 

and  Denmark 10,000,000 

*  According  to  Sir  George  Paish,  of  the  sum  remitted  to  Great  Britain,  in 
1906,  about  $10,000,000  went  to  Ireland  alone  —  $5,500,000  through  banks  and 
over  $4,000,000  by  the  post  office. 

It  is  probable  that  Mr.  Speare's  total  of  $250,000,000  is  somewhat 
too  large,  as  a  statement  of  purely  immigrant  remittances.  A  portion 
of  this  money  was  remitted  by  persons  returning  to  Europe  to  live, 
and  should  be  set  over  against  the  item  of  cash  brought  to  the 
country  by  newly  arriving  immigrants.  Moreover,  many  of  the 
money  orders  and  drafts  are  sent  to  Europe  in  purchase  of  small 
parcels  of  goods,  which  figure  in  the  merchandise  imports ;  it  is 
not  possible  to  determine  if  a  small  remittance  represents  a  purchase 
of  commodities  or  merely  a  gift.  Allowing  for  these  factors,  it  is 
probable  that  immigrants'  remittances  in  1907  amounted  to  from 
$150,000,000  to  $200,000,000.^ 

The  other  items  of  indebtedness  in  this  period  were  much  smaller 
than  the  three  just  reviewed.  The  chief  of  them  was  freight  pay- 
ments. In  this  period  the  foreign  carrying  trade  in  American  vessels 
reached  its  lowest  point.  In  1874,  27.2  per  cent  of  our  total  foreign 
trade  was  in  American  vessels,  in  1894,  13.3  per  cent,  and  in  1902, 
8.2  per  cent.  In  19 14,  the  jiercentage  was  9.4  in  American  vessels,  and 

^  North  American  Revieiv,  January,  1908,  p.  109. 

-See  Sir  Gcorpe  Paish,  Trade  Balance  oi  the  United  States,  pp.  182-186. 
National  Monetary  Commission,  1910. 


UNITED  STATES  BALANCE  OF  TRADE  195 

90.6  in  foreign  vessels.  For  the  whole  period  1896-19 14,  imports 
in  foreign  vessels  amounted  to  $18,182,755,000,  and  exports  in 
American  vessels  to  $2,154,551,000,  leaving  an  excess,  on  which  net 
outward  freight  payments  were  due,  of  $16,028,204,000.  Hobson's 
freight  index,  after  the  marked  fall  from  the  early  seventies  to  the 
early  nineties  already  referred  to,  shows  but  little  further  decline. 
The  index  number  for  1895  is  75.8;  to  1901  the  trend  is  upward, 
to  103  in  that  year;  thereafter  to  1908  the  trend  is  downward,  to 
61.5  in  1908,  after  which  it  rises  again  to  107.5  ^^  1912.^  The 
average  number  for  the  period  1896-1914  is  73.9.  So  far  as  the 
level  of  ocean  rates  is  concerned,  therefore,  we  may  take  approxi- 
mately the  same  percentage  of  freight  to  value  of  trade  as  we  have 
taken  for  1895,  namely  5  per  cent.  As  a  check  upon  this  figure,  one 
may  find  the  total  value  of  the  world's  imports  and  exports,  and  by 
subtracting  the  latter  from  the  former  reach  a  figure  which  repre- 
sents roughly  the  cost  of  carriage.  Jn  1907  the  world's  imports  were 
estimated  at  $18,685,000,000,  and  the  world's  exports  at  $16,918,- 
000,000 ;  so  that  the  difference,  which  measures  roughly  the  cost 
of  carriage,  was  $1,767,000,000,"  which  is  5  per  cent  of  the  total 
world  foreign  trade.  Applying  this  figure  to  the  net  sum  on  which 
freights  were  payable  by  the  United  States  in  the  period  1896- 
1914,  $16,028,204,000,  we  find  the  net  freight  charge  to  be  $801,- 
410,000,  or  $42,179,000  a  year.  Deducting  as  before  one-fifth  for 
port  expenses'*  we  find  the  net  earnings  of  American  vessels  in  the 
export  trade  to  be  $86,182,000;  of  foreign  vessels  in  the  import 
trade  $727,310,000.  The  sum  remitted  abroad  on  this  account  was 
then  some  $641,000,000,  about  $33,700,000  a  year. 

As  an  indication  of  the  state  of  our  balance  of  international  pay- 
ments in  a  single  year  of  the  immediate  pre-war  period,  we  give 
the  balance  drawn  up  by  Sir  George  Paish  for  the  United  States 
National  Monetary  Commission  of  19 10.  The  balance  is  for  the 
fiscal  year  July  i,  1908-June  30,  1909: 

iC.  K.  Hobson,  The  Export  of  Capital,  p.   182.  2  ibid.  p.  174. 

3  Hobson's  detailed  account  of  receipts  and  expenditures  of  seven  voyages 
in  1907  showed  the  percentage  of  expenses  in  foreign  parts  to  be  30  per  cent 
of  total  receipts. 


196  BULLOCK,  WILLLAjNIS,  AND  TUCKER 

BALANCE  OF  PAYMENTS  OF  THE  UNITED  STATES,  1909 

Merchandise 

Exports $1,663,000,000 

Imports 1,312.000,000 

Excess  of  exports  over  imports      ....  $351,000,000 

Gold 

Exports $92,000,000 

Imports 44,000,000 

Excess  of  exports  over  imports      ....     $48,000,000 

Silver 

Exports $56,000,000  • 

Imports 44.000,000 

Excess  of  exports  over  imports      .     .     .     .     $12,000,000 

Total     Excess    of     Merchandise    and 

Specie  Extorts  over  Imports $411,000,000 


Remittances  of  interest  . 
Tourists'  expenditures  . 
Immigrants'  remittances 

Freight 

Total  Remittances 


$250,000,000 

170,000.000 

150,000,000 

25,000,000 

$595,000,000 


Excess  (liquidated    by    permanent    or    private   investments  of 

capital) $184,000,000 


G.   RESUME  OF  OUR  BALANCE  OF  TRADE  FROM  1820  TO  1914 

The  historical  survey  of  our  balance  of  trade,  as  given  in  the 
preceding  pages,  has  served  its  purpose  if  it  has  made  clear  the 
broad  outlines  of  our  gradually  changing  international  situation,  as 
now  one  factor  and  now  another  has  exercised  a  predominating 
influence.  Defective  as  many  of  the  data  are,  particularly  in  the 
earliest  periods,  the  main  facts  of  the  record  stand  out  with  quite 
astonishing  clarity,  so  that  very  rarely  is  one  in  serious  doubt  in 
ascertaining  what  in  any  given  period  were  the  factors  of  major 
consequence,  or  in  measuring  the  extent  of  their  effect  upon  the 
balance  of.  merchandise  trade. 


UNITED  STATES  BALANCE  OF  TRADE 


197 


Since  our  account  has  been  purposely  condensed  to  the  bare 
essentials  of  a  descriptive  summary,  there  is  no  need  of  detailed 
resume.  The  general  course  of  our  trade  and  our  trade  balance  from 
182 1  to  1914  is  shown  in  the  accompanying  charts.  The  first^ 
shows  the  annual  exports  and  imports.  In  the  second  chart,  below,  is 
shown  the  average  annual  balance  of  trade  in  each  of  the  periods 
from  182 1  to  1914.    It  shows  that  in  response  to  alterations  in  the 


Average  of  +  $487,000,000 
(Toxirist^Expenditures  and 
Immigrants'  Remittances) 


o- 


AVERAGE   ANNUAL  BALANCE  OF  MER- 
CHANDISE    TRADE     OF    THE    UNITED 
STATES  DURING  SUCCESSIVE  PERIODS, 
1821  -  1914* 
(After  1873  silver  is  treated  as  merchandise) 


Excess  of  Exports  (+) 

Average  of  4  $3,000,000 
(Temporary  Cessation 
of  Borrowings) 


-c 


Average  of  -$11,000,000 

(Shipping  Earnings, 

and  Borrowings) 

Excess  of  Imports  {  —  ) 


Average  of  +  $113 

(InterestPayments  to 


Average  of  -$64,000,000 
(Heavy-Borrowing   from  Europe) 


«-1821  to  1837- 
*  Fiscal  years 


1838  to 


1849 


X- 


-1850  to  1873- 


-X- 


-1874  to  1895- 


-1896  to  1914- 


various  invisible  items  of  indebtedness,  the  size  and  the  state  of  the 
balance  have  undergone  gradual  change ;  and  that,  in  general,  except 
for  the  brief  period  from  1838  to  1848,  our  balance  of  trade  was 
unfavorable  down  to  1874,  first  by  reason  of  our  shipping  earnings, 
then  because  to  these  earnings  was  added  an  inflow  of  foreign  capi- 
tal, and  finally  on  account  of  our  large  production  and  export  of 
gold,  combined  with  still  heavier  borrowings  of  foreign  capital ; 
but  that,  since  the  overturn  which  occurred  in  1874,  our  balance  has 
been  favorable,  first  moderately,  because  of  the  gradually  growing 
interest  charges  on  foreign  capital  invested  in  earlier  periods,  and 
then,  since  the  late  nineties,  more  markedly,  by  reason  of  the  rapid 
growth  of  tourists'  expenditures  and  immigrants'  remittances. 


lOn  pages  160-161  supra. 


198 


BULLOCK,  WILLLVMS,  AXD  TUCKER 


UNITED  STATES  BALANCE  OF  TRADE  BY  PERIODS,  1821-1918 

(Units  of  1 1, 000,000) 


Totals  for  the  Period 

Averages 

FOR  THE  Period 

Period 
(Fiscal 

Ex- 
ports* 

Im- 
ports * 

Balance 

Ex- 
ports* 

Im- 
ports* 

Balance 

years) 

Excess  of 
exports  (+) 

Excess  of 

imports  (-) 

Excess  of 

exports(  f) 

Excess  of 
imports  (— ) 

1821-1837 
1838-1S49 
1850-1S73 
1874-1895 
1896-1914 
I915-1918 

1389 

1392 

6585 

17231 

32128 

19632 

1574 
1358 
8125 

14738 
22866 

9645 

185 

82 
116 

274 

783 

1 69 1 

4908 

93 

113 

338 

670 

1204 

241 1 

" 

34 

3 

1541 

64 

2493 
9262 
9987 

"3 

487 
2497 

*  After  1873,  these  figures  include  imports  and  exports  of  silver. 


II.  The   History   of   Our    Foreign   Trade   Balance 
DURING  the  Great  War^ 

A.     INTRODUCTION 

With  the  great  war  came  a  profound  dislocation  of  international 
commerce.  Exports  from  the  United  States  have  grown  into  figures 
such  as  have  never  been  witnessed  in  any  country.  There  has  been 
an  inflow  of  gold  so  enormous  that  today  the  United  States  is  holding 
one-third  of  the  total  monetary  stock  of  the  world.  A  nation  which 
down  to  1914  had  been  the  world's  greatest  borrower  of  capital  has 
become  the  world's  greatest  lender,  in  the  scale  and  rapidity  of  its 
advances  if  not  in  the  total  amount  at  present  outstanding.  Finally, 
our  merchant  marine,  virtually  moribund  since  Civil  War  times,  has 
been  revived,  at  least  temporarily,  on  a  gigantic  scale. 

And  this  is  not  all.  As  a  result  of  war's  interferences  with  normal 
economic  activities,  there  have  been  other  significant  realignments 
of  international  currents.  For  the  time,  at  least,  a  great  change  has 
taken  place  in  the  organization  of  commerce.  Before  the  war  the 
British  and  German  merchant  fleets  in  their  voyages  around  the 
world  brought  back  all  sorts  of  products  from  all  corners  of  the  earth, 
to  be  redistributed  over  the  world.  The  United  States  acquired 
its    Egyptian    cotton,    its    Far    Eastern    and    Brazilian    rubber,    its 

^  Bullock,  Williams,  and  Tucker,  The  Balance  of  Trade,  pp.  234-238. 


UNITED  STATES  BALANCE  OF  TRADE 


199 


East  Indian  and  Bolivian  tin,  its  Australian  and  Argentine  wool 
largely  through  these  great  trading  nations.  Today  we  buy  our  raw 
materials  direct  from  the  producing  countries.  The  reexport  trade 
of  Hamburg  has,  of  course,  been  stopped ;  that  of  London  has  de- 
clined ;  and  the  United  States  has  become  an  important  reexporter. 


+  $2,497,000,000 


AVERAGE  ANNUAL  BALANCE  OP 
MERCHANDISE  TRADE  OF  THE 
UNITED  STATES  DURING  THE 
GREAT  WAR  COMPARED  WITH 
PRECEDING  PERIODS. 


Excess  of  Exports  (  +  ) 


$64.0,00.000 


-1850  to  1873- 


-X^ 


-1874  to  1895- 


(Dates  refer  to  fiscal  years) 


1915 

-1896  to  1914 >  to  - 

1918 


In  the  minds  of  some,  the  growth  of  reexports  appears  to  signify  our 
permanent  participation  in  international  merchandising,  in  the  mid- 
dleman functions  of  world  commerce,  with  New  York  as  a  central 
world  market  from  which  there  will  extend  a  world-wide  distributive 
organization,  operating  through  American  banks  in  foreign  coun- 
tries, American  export  and  import  houses  around  the  world,  and,  as 
the  central  pillars  of  support  for  so  vast  a  structure,  large  capital 
investments  in  other  lands  and  a  great  merchant  fleet.  That  is  one 
of  the  interesting  questions.    Is  our  reexport  trade  to  grow,  or  is  it 


200  BULLOCK,  WILLL^VMS,  AND  TUCKER 

only  incidental  and  sporadic?  Is  New  York  to  become  an  inter- 
national trading  center,  a  second  London,  or  have  we  taken  over 
some  of  the  functions  and  constructed  some  of  the  machinery  of 
such  a  center  merely  for  the  time,  and  because  temporarily  we  have 
been  obliged  to  do  so?  During  the  war  there  has  been  a  remark- 
able extension  of  American  banks  into  foreign  fields,  and  at  home 
the  establishment  of  agencies  for  the  analysis  and  promotion  of 
foreign  investment.  By  new  commercial  and  banking  legislation  we 
have  provided  a  more  adequate  basis  for  a  large-scale,  permanent 
business  of  export.  Our  foreign  trade  conventions  and  councils  are 
conducting  educational  campaigns  to  promote  foreign  trade.  Do 
these  activities  point  at  once  to  a  two-fold  permanent  development 
of  large-scale  foreign  investment  and  foreign  trade,  similar  to  that 
of  Great  Britain  and  Germany  before  the  war? 

Our  unprecedented  export  trade  during  the  war,  our  enormous 
loans  to  Europe,  and  the  revival  of  our  merchant  fleet  have  brought 
about  a  profound  change  in  our  balance  of  international  payments, 
so  that,  for  the  time  at  least,  the  United  States,  up  to  19 14  a  debtor 
nation,  has  become  the  world's  creditor.  Such  a  condition  implies 
the  receipt  of  payment  from  the  debtor,  either  in  gold,  in  securities, 
or  in  goods.  Payment  of  our  enormous  balances  in  gold  is  out  of 
the  question.  Payment  in  securities  implies  a  continuance  of  the 
war  condition  of  our  trade — an  outward  flow  of  capital  and  goods, 
an  excess  of  exports  over  imports.  Such  a  movement  financed,  as  it 
must  be,  by  further  credit  expansion  in  European  countries,  and 
occurring  coincidently  with  the  payment  of  the  German  indemnity, 
would  probably  produce  in  the  Allied  countries  further  inflation  of 
price  levels,  already  raised  to  new  heights  in  all  countries.  And  if, 
for  a  time,  we  "carry  the  bag"  and  enable  Europe  to  settle  her  ad- 
verse balances  out  of  advances  from  our  own  pockets,  eventually  those 
balances,  augmented  by  the  new  borrowings,  must  be  paid  in  goods. 
Our  imports  must  increase,  our  excess  of  exports  disappear ;  and  it 
may  be,  though  that  subject  is  reserved  for  later  discussion,  that 
an  excess  of  imports  will  take  its  place.  When  will  this  change 
occur?  And  what  will  be  its  effect  upon  the  level  of  prices  in  the 
United  States,  as  compared  with  that  in  European  countries? 

These  are  some  of  the  interesting  questions  raised  by  the  war  just 
ended.    Many  of  the  larger  problems  we  cannot  hope  to  discuss  in 


UNITED  STATES  BALANCE  OF  TRADE 


201 


the  present  article.  But  we  may  venture  the  opinion  that  many 
of  the  claims  and  predictions  regarding  our  new  trading  position  are 
over-optimistic.  Our  view  regarding  reexports,  for  example,  is  that 
this  country  has  not  yet  developed  the  intricately  coordinated  in- 
ternational mechanism  of  banking,  trading,  merchandising,  and 
speculating  to  the  extent  necessary  for  a  permanent  reexport  trade 
of  large  dimensions.  Our  acceptance  and  discount  facilities  are  as 
yet  comparatively  slight.  At  present  our  only  real  acceptance 
market  is  in  the  federal  reserve  banks.^ 

We  shall  confine  ourselves  in  the  present  article  to  the  considera- 
tion of  those  questions  which  arise  directly  out  of  the  changes  which 
have  occurred  in  our  balance  of  international  payments ;  these  ques- 
tions are :  What  has  been  the  state  of  our  balance  of  payments 
during  the  war?  What  further  changes  are  likely  to  result?  We 
take  up  first  the  statement  of  the  balance  in  the  war  period,  begin- 
ning with  the  merchandise  trade. 

B.     MERCHANDISE 

The  following  table  shows  the  balance  of  trade  of  the  United 
States  from  July  i,  1914,  to  January  i,  1919. 


UNITED  STATES  BALANCE   OF  TRADE  DURING  THE  WAR 

(Units  of  1 1, 000,000) 


Exports 

Imports 

KXTFSS  OP 

Fiscal  Years 

Com- 
modities 

Silver 

Total 

Com- 
modities 

Silver 

Total 

Kxi'ORTS 

1915 

1916 

1917 

1918 

1919 

2768 

4334 
6290 
5920 
7233 

51 
60 

78 

139 
301 

2819 

4394 
,6368 

6059 

7534 

1674 
2198 
2659 
2946 
3096 

29 
34 

35 
70 

79 

1703 
2232 

2694 

3016 

3175 

III6 
2162 
3674 
3043 

4359 

Yearly  Average 

5309 

126 

5435 

2515 

49 

2564 

2871 

^A  computation  by  Mr.  Leopold  Frederick,  of  the  American  Smelting  and 
Refining  Company,  showed  that  at  the  end  of  November,  1918,  the  total  of 
outstanding  acceptances  representing  the  financing  of  imports  and  exports 
through  New  York  was  only  $210,000,000,  as  against  $500,000,000  in  London. 
See  Federal  Reserve  Biilletin,  January  i,  1919,  p.  21. 


2  02  BULLOCK,  WILLL\MS,  AND  TUCKER 

The  table  shows  total  exports  of  $22,974,000,000  and  imports  of 
$11,166,000,000,  or  a  favorable  balance  of  $11,808,000,000.  This 
enormous  balance,  in  four  and  one-half  years  of  trade,  is  equal  to 
the  sum  of  the  annual  balances  from  1873  to  1914-^  For  the  pre- 
war period,  as  we  have  seen,  the  average  annual  excess  of  exports 
was  about  $487,000,000;  during  the  war  the  average  balance  was 
$2,624,000,000,  or  the  equivalent  of  the  balances  for  five  years  of 
the  pre-war  period. 

These  large  balances  were  due  entirely  to  the  expansion  of  ex- 
ports, and  not  to  a  diminution  of  imports.    The  quantity  of  goods 
imported  has  undoubtedly  diminished  ;   for  Europe,  upon  which  we 
were  wont  to  draw  most  heavily,  was  no  longer  able  to  spare  any 
large  quantity  of  merchandise,  and  we,  especially  after  our  entrance 
into  the  war,  were  forced  by  the  need  of  conserving  tonnage  and  by 
other  considerations  to  restrict  most  imports  not  essential   to  the 
conduct  of  the  war.    Yet  such  was  the  rise  of  prices  in  the  producing 
markets,  that  the  total  value  of  imports  showed  a  very  material 
increase.    In  19 15  the  value  of  imports  was  about  the  same  as  in 
any  of  the  immediate  pre-war  years;  but  from  191 6  on  there  was  a 
considerable  increase,  from  $1,703,000,000  in  1915  to  $3,016,000,000- 
in    1918.    This    increase    of    about    $1,300,000,000,    however,    was 
slight   compared   with    that    in    exports.    The    increase   of    exports 
showed  itself  first  in  the  fiscal  year  1916.     For  the  first  months  of 
the  war  exports  declined  sharply ;  and  it  was  not  until  December, 
1 9 14,  that  they  reached  the  level  of  the  preceding  year.    From  then 
on  the  expansion  was  rapid,  but  by  reason  of  the  decline  in  the 
autumn  of  19 14,  the  export  figures  for  the  fiscal  year  191 5  were  but 
little  above  those  of  1914.^    In  1916  exports  were  about  81  per  cent 
greater   than    in    1914.    In    1917,   they    reached    the    extraordinary 
figure  of  $6,368,000,000,  an  increase  of  163  per  cent  over  the  exports 
of  19 14;  the  trade  balance  in  that  year  was  $3,674,000,000,  or  over 

1  Excess  of  exports,  1873-1Q14:   $11,754,849,000. 

2  Fiscal  years,  including  silver.    This  increase  of  77  per  cent  in  the  value  of 

imports  should  be  compared  with   the  increase  in  prices,  which,  as  shown  by 

various  index  numbers,  was  from  81  per  cent  to  91  per  cent  during  the  same 

jjcriod. 

(Units  of  ;f 1, 000,000) 

Exports  Imports 

3  1014 2,420        1,924 

lOrS 2,819       1,703 


UNITED  STATES  BALANCE  OF  TRADE  203 

six  times  the  balance  of  191 2,  over  five  times  that  of  19 13,  and 
nearly  eight  times  that  of  1914.  In  1918,  exports  receded  slightly, 
imports  were  slightly  larger,  and  the  trade  balance  declined  to 
$3,043,000,000.  But  in  the  fiscal  year  just  closed,  according  to  the 
preliminary  figures  announced  by  the  Department  of  Commerce, 
exports  increased  to  $6,806,000,000,  the  largest  total  in  the  history 
of  American  foreign  trade ;  the  trade  balance  also  reached  its 
highest  point,  $3,704,000,000. 

These  enormous  exports  were  due  to  the  war  demands  of  Europe, 
and  to  the  great  rise  in  export  prices  consequent  upon  that  demand. 
In  some  measure,  they  were  due  to  the  fact  that  the  Allies  were  not 
able  to  meet  the  needs  of  neutral  markets,  notably  in  South  America 
and  the  Far  East,  in  anything  like  the  volume  of  normal  times,  so 
that  those  countries  turned  to  the  United  States  for  manufactured 
goods.  With  the  chief  of  these  latter  countries,  however,  the  trade 
balances  have  been  against  us.  Exports  to  Argentina  in  the  period 
July  I,  1914,  to  July  I,  1918,  were  $285,000,000,  against  $544,000,- 
000  imported  from  that  country,  giving  an  adverse  balance  of  $259,- 
000,000;  total  exports  to  Brazil  were  $187,000,000  and  the  imports 
$490,000,000,  giving  an  adverse  balance  of  $303,000,000;  from 
Japan  the  imports  were  $740,000,000  and  the  exports  thereto  $523,- 
000,000,  making  the  balance  against  us  $217,000,000.  In  general, 
our  trade  balances  have  been  markedly  favorable  with  the  Allies, 
moderately  favorable  with  the  British  possessions  and  European 
neutrals,  and  unfavorable  with  neutrals  outside  of  Europe. 

Our  exports  have  expanded  and  our  trade  balances  have  grown 
because  the  belligerent  nations  of  Europe  have  needed  enormous 
quantities  of  food  and  materials  of  war.  Of  the  three  large  classes 
which  compose  international  trade — foodstuffs,  manufactures,  and 
raw  materials  for  manufactures — the  great  gains  have  been  in 
the  first  two.  Exports  of  raw  materials  actually  declined  —  from 
$2,960,000,000  in  the  four  years  preceding  the  war  to  $2,675,000,000 
for  the  period  July  i,  19 14,  to  July  i,  1918.  The  reason  for  the 
decline  was  the  partial  or  total  closing  of  European  markets.  The 
chief  export  in  this  group  is  cotton.  With  the  outbreak  of  war,  cot- 
ton shipments  to  Central  Europe  and  to  Belgium  ceased ;  those  to 
Russia  dwindled  to  almost  nothing ;  those  to  Great  Britain,  France, 
and    Italy,   our    other   principal    cotton    markets,    were    materially 


2  04  BULLOCK,  WILLL\MS,  AND  TUCKER 

reduced  by  the  loss  of  labor  and  the  utilization  of  factories  for  other 
work,  and  the  reduction  of  their  exports  of  cotton  manufactures. 
Cotton  exports  therefore  fell  from  36,000,000  bales,  the  aggregate 
for  the  four  years  1911-14,  to  25,000,000  bales  in  the  four  years 
191 5-18.  The  increase  of  prices,  however,  prevented  the  total  value 
of  cotton  exports  from  showing  a  corresponding  decline. 

Meanwhile,  exports  of  food  and  manufactures  have  increased 
enormously.  Foodstuffs  increased  from  $1,757,000,000,  the  total 
for  the  four  years  preceding  the  war,  to  $4,780,000,000  for  the  four 
years  July  i,  1914,  to  July  i,  1918.  This  increase  occurred  mainly 
in  four  commodities — wheat,  flour,  meats,  and  dairy  products. 
Comparing  the  four-year  period  preceding  the  war  with  the  four 
years  ending  with  July  i,  19 18,  exports  of  wheat  and  wheat  flour  in- 
creased from  $432,000,000  to  $1,456,000,000,  or  237  per  cent;  and 
meat  and  dairy  products  exported  increased  from  $605,000,000 
to  $1,609,000,000,  or  166  per  cent. 

But  it  was  in  manufactures  that  the  most  extraordinary  expansion 
occurred.  From  $4,210,000,000  in  the  four  pre-war  years,  manu- 
factures exported  increased  to  the  enormous  total  of  $11,380,000,000. 
The  chief  gains  were  in  explosives,  iron  and  steel  goods,  chemicals, 
and  metal  for  shells.  Explosives  increased  from  $21,000,000  to 
$1,716,000,000,  manufactures  of  iron  and  steel  from  $1,055,000,000 
to  $3,140,000,000,  chemicals  from  $105,000,000  to  $662,000,000, 
and  brass  manufactures  from  $20,000,000  to  $662,000,000.  Only 
less  striking  were  the  increases  in  cotton  manufactures  (from 
$154,000,000  to  $485,000,000),  in  woolen  manufactures  (from  $15,- 
000,000  to  $122,000,000),  in  automobiles  (from  $97,000,000  to 
$420,000,000),  and  in  leather  goods  (from  $158,000,000  to  $350,- 
000,000).  In  1914  manufactures  constituted  47  per  cent  of  our 
total  exports.  During  the  war  period  they  were  58  per  cent. 
*********** 


C.     GOLD,    CREDIT,    AND    FOREIGN    EXCHANGE 

How  was  this  enormous  balance  met?  It  was  met  in  part  by  a 
net  import  of  gold.  As  was  to  be  expected,  the  international  move- 
ment of  gold  during  the  war  surpassed  anything  previously  known 
to  commerce.    Both  the  exports  from  and  the  imports  to  the  United 


UNITED  STATES  BALANCE  OF  TRADE 


205 


States  were  very  much  larger  than  ever  before.  Most  of  the  gold 
imported  represented  purchases  made  by  Great  Britain,  France, 
Russia,  and  Italy.  They  reached  us  chiefly  through  Canada,  so 
that  in  our  official  record  that  country  was  credited  with  exceedingly 
large  gold  exports  to  the  United  States.  Imports  of  gold  ore, 
bullion,  and  coin  into  the  United  States  from  July  i,  19 14  to  Decem- 
ber 31,  1918,  aggregated  $1,767,900,000,  as  against  gold  exports 
of  $738,900,000,  leaving  a  total  net  import  of  $1,029,000,000. 

GOLD  BALANCE  OF  THE  UNITED   STATES   DURING  THE  WAR 

(Units  of  |i,ooo,ooo) 


Exports 

Imports 

Balance 

Fiscal  Years 

Excess  of 

exports  (+) 

Excess  of 

imports  (-) 

1915 

1916 

1917 

1918 

I919 

146.2 

90.4 

291.9 

190.8 

n6-6 

175.0 
494.0 
977.2 
109.8 
62.4 

28.8 
403.6 

685-3 

81.0 

54.2 

Yearly  Average     .    .    . 

167.2 

3637 

196.5* 

*  Net 

imports. 

As  an  offset  against  a  favorable  trade  balance  of  over  $11,000,- 
000,000,  this  sum  is  inconsiderable.  But  when  considered  in  rela- 
tion to  the  world's  stock  of  gold,  its  effect  upon  bank  reserves  in 
the  countries  from  which  it  came  and  in  our  own  country,  its  rela- 
tion to  the  huge  superstructure  of  credit  piled  up  in  all  belligerent 
countries,  the  resultant  changes  in  price  levels,  and  the  mechanism 
of  foreign  exchange  whereby  international  transactions  are  effected, 
its  importance  is  evident.  The  approximate  stock  of  gold  in  the 
United  States  in  1910  was  $1,710,000,000  ;  in  1914  it  was  $1,805,098,- 
000.  By  the  end  of  1917  it  had  increased  to  $3,041,500,000,  or 
about  one-third  of  the  world's  total  stock  of  gold  in  banks,  public 
treasuries,  and  circulation.^  In  19 18  there  was  a  slight  net  export 
of  gold,  amounting  to  $67,000,000  for  the  fiscal  year ;  on  the  other 


1  Report  of  Committee  on  Gold  Situation,  United  States  Department  of  the 
Interior,  Bulletin  144,  October,  1918,  p.  19. 


206  BULLOCK,  WILLLAMS,  AND  TUCKER 

hand  the  total  gold  reserves  of  the  federal  reserve  banks  increased 
from  $1,720,768,000  (December  28,  1917)  to  $2,146,219,000  (De- 
cember 28,  1918).^ 

This  large  increase  in  our  gold  stock  meant  a  heavy  drain  upon 
the  gold  stocks  of  Europe.  According  to  the  Report  of  a  Joint 
Committee  Appointed  jrom  the  Bureau  of  Mines  and  the  United 
States  Geological  Survey  to  study  the  gold  situation  (Bulletin  144, 
Oct.  30,  1918),  the  gold  stock  of  France  decreased  from  $1,384,- 
125,000  in  1915  to  $634,403,000  in  1918,  and  that  of  England  from 
$661,944,000  to  $327,318,000  in  the  same  period.  In  Italy  gold 
reserves  declined  from  $335,689,000  to  $155,785,000;  the  German 
stock  decreased  from  $714,073,000  to  $587,041,000;  that  of  Austria 
Hungary  from  $296,300,000  to  $52,398,000;  and  the  gold  stock  of 
Russia  decreased  from  $1,058,480,000  to  $630,099,000  by  Octo- 
ber 29,  191 7,  since  which  time  no  figures  are  available. 

^Annual  Report  of  the  Federal  Reserve  Board,  1918,  p.  15. 


VII 

TAUSSIG:    THE    PRESENT    AND    FUTURE    OF    THE 
INTERNATIONAL  TRADE  OF  THE  UNITED  STATES' 

THE  outstanding  feature  of  the  international  trade  of  the 
United  States  during  recent  years  has  been  the  enormous 
excess  of  merchandise  exports.  The  figures,  familiar  though  they 
are,  remain  astounding.  During  the  five  fiscal  years  from  June 
30,  1914,  to  June  30,  19 19,  the  exports  exceeded  the  imports,  on 
the  average,  by  nearly  three  billion  dollars  each  year.  In  the  amounts 
of  these  "favorable"  balances,  as  well  as  in  their  character,  the 
phenomena  are  unexampled. 

The  exports  stand  mainly  for  loans.  True,  during  the  first  year 
or  two  of  the  European  war  they  were  paid  for,  in  part  at  least,  by 
cash  remittance.  Gold  was  sent  to  the  United  States ;  and  here 
again  the  amounts  were  quite  beyond  anything  before  experienced  in 
the  world's  history.  But  these  remittances,  extraordinary  as  they 
were,  could  not  liquidate  the  obligations  for  the  enormous  excess 
of  exports.  Loans  were  arranged,  beginning  with  the  Anglo-French 
loan  of  191 5,  and  followed  by  other  issues  of  similar  character. 
After  the  entrance  of  the  United  States  into  the  war  in  the 
spring  of  191 7,  the  lending  process  still  continued,  but  through  a 
different  channel.  Our  government  undertook  on  its  own  account 
the  advances  which  served  to  finance  the  ever-mounting  volume 
of  exports.  No  transactions  comparable  to  these  have  ever  ap- 
peared in  the  history  of  international  lending  and  borrowing 
The  problems  which  they  present  are  significant  both  for  economic 
theory  and  for  the  practical  exigencies  of  the  present  and  the 
immediate  future.  In  the  following  pages  I  shall  endeavor  to 
analyze  them  from  the  point  of  view  both  of  theory  and  of 
workaday  significance. 

^F.  W.  Taussig,  in  Quarterly  Journal  of  Economics,  November,  1919,  Vol. 
XXXIV,  pp.  1-18. 

207 


2o8  TAUSSIG 

First,  the  theoretical  problems.  How  may  international  loans 
be  expected  to  influence  the  trade  between  the  lending  and  borrow- 
ing countries? 

Under  the  conditions  which  are  normally  assumed  in  economic 
theory — an  existing  equilibrium  of  merchandise  imports  and  ex- 
ports, no  other  intervening  factors — the  iirst  phase  in  the  opera- 
tions would  be  an  outflow  of  specie  from  the  lending  country.  That 
country  would  tend  to  have  prices  and  incomes  lower  than  before, 
or,  what  comes  to  the  same  thing,  prices  and  incomes  remaining  low 
if  in  the  world  at  large  the  movement  should  happen  to  be  upward. 
The  reverse  tendency  would  appear  in  the  borrowing  country.  The 
double  change  would  have  the  effect  of  stimulating  the  movement 
of  goods  from  the  lending  country  and  bringing  about  an  excess  of 
exports  over  imports.  The  stimulus  to  merchandise  exports  might 
take  place  in  even  more  direct  fashion,  through  the  circumstance  that 
the  banking  and  financing  houses  might  be  interested  also  in  enter- 
prises manufacturing  for  export.  The  details  of  the  possible  variants 
of  these  comparatively  simple  transactions  need  not  detain  us  here. 
Suffice  it  to  say  that  the  trend  toward  increasing  merchandise 
exports  from  the  lending  country  and  toward  a  "favorable"  balance 
of  trade  is  a  familiar  phenomenon.  Indeed,  it  appears  in  actual 
experience  even  more  promptly  and  unmistakably  than  the  theoreti- 
cal analysis  might  lead  one  to  expect.  The  characteristic  to  which 
attention  is  to  be  directed  here  is  that  the  foreign  demand  for  goods 
follows  the  loans,  or  at  best  accompanies  the  loans,  and  that  the 
primary  moving  impulse  is  the  loan  itself,  the  foreign  demand  for 
exports  being  a  consequence  or  accompaniment. 

In  the  operations  which  we  are  here  following,  however,  the  case 
is  different.  The  moving  cause  in  this  case  was  the  initial  and  enor- 
mous demand  for  American  goods.  The  loans  were  consequence, 
not  cause.  The  stage  preceding  the  loans,  and  subsequently  affected 
by  them,  was  not  a  stage  of  equilibrium,  but  one  of  great  excitement 
and  instability — abnormal  foreign  demand,  inflowing  gold,  rising 
prices.  The  loans  caused  no  outflow  of  specie ;  they  served  first  to 
check  in  some  degree  the  inflow  of  specie  and  in  the  end  to  prevent 
it  completely.  They  were  at  no  time  either  followed  or  accompanied 
by  a  tendency  to  lower  prices  in  the  lending  country.  Their  effect 
was  only   to  stay   the  tide  of   rising  prices.    In  other  words,   the 


THE  PRESENT  AND  FUTURE  209 

theoretical  analysis  which  would  be  applied  to  the  ordinary  or 
normal  conditions  must,  in  this  case,  be  supplemented  by  taking 
account  of  a  complicating  circumstance — an  almost  insatiable 
demand  for  the  exports  of  the  United  States.  And  it  was  in  conse- 
quence of  that  demand  that  the  United  States  came  to  be  a  lending 
country. 

The  forces  were  not  only  complex ;  they  were  also  enormous  in 
volume.  The  ordinary  mechanism  of  adjustment  proved  quite  in- 
adequate for  regulating  this  cataclysmic  overturn.  It  was  simply 
impossible  to  find  anywhere  in  the  world  means  of  remittance,  of 
the  usual  kind,  sufficient  in  amount  to  provide  payment  for  the 
exports  demanded  from  the  United  States.  The  orthodox  analysis 
of  the  case  is  that  an  excess  of  exports  will  be  paid  for  by  inflow  of 
specie,  continuing  until  changes  in  prices  lead  to  the  reestablishment 
of  equilibrium.  But  nothing  of  this  kind  was  possible.  If  the  gold 
flow  into  the  United  States  had  been  allowed  to  continue  until  it 
thus  came  automatically  to  an  end,  all  the  available  gold  in  allied 
countries  would  have  been  carried  to  the  United  States,  and  yet 
without  bringing  its  own  remedy.  Here,  as  in  so  many  other  cases, 
time  is  of  crucial  importance.  If  the  process  had  been  spread  over 
a  decade  or  two,  the  results  contemplated  by  theory  would  presum- 
ably have  come  about.  Given  time  enough,  prices  and  merchandise 
imports  and  exports  would  have  shifted  in  the  predicted  way.  But 
so  enormous  a  movement,  concentrated  in  so  short  a  period,  was 
quite  beyond  the  capacity  of  the  ordinary  channels  of  commerce  and 
trade.  It  would  not  be  accurate  to  say  that  in  such  case  economic 
theory  breaks  down.  The  case  was  simply  so  extraordinary  both 
in  volume  and  in  character  as  never  to  have  been  contemplated  in 
theory. 

A  word  now  as  to  the  causes  of  the  rise  in  prices  which  in  this 
case  preceded  the  international  loans,  and,  as  has  just  been  noted, 
was  checked  by  the  loans.  Two  periods  are  to  be  distinguished ; 
first,  that  of  loans  financed  by  banking  houses ;  and  second,  that  in 
which  the  loans  were  financed  by  our  government  itself. 

During  the  first  stage  the  underlying  cause  of  the  rising  prices 
was  the  inflow  of  gold.  In  the  course  of  the  calendar  years  19 15 
and  191 6  a  round  billion  of  dollars  in  gold  was  imported.  I  need 
not  enter  here  on  the  thorny  questions  concerning  the  precise  way  in 


2  10  TAUSSIG 

which  such  an  inflow  affects  prices.  One  may  freely  admit  that  a 
rise  in  prices  might  have  taken  place  without  it,  and  also  that  even 
with  it  an  immediate  rise  in  prices  would  not  necessarily  appear. 
But  all  will  agree  that  the  great  influx  of  specie  during  19 15  and 
19 1 6,  the  consequent  redundance  of  bank  reserves,  and  the  ease 
with  which  the  Federal  Reserve  System  was  enabled  to  bring  about 
an  increase  both  of  bank  deposits  and  of  notes,  made  possible  a  rise 
in  prices  that  would  otherwise  have  met  with  serious  obstacles.  And 
the  accumulation  of  specie  which  took  place  during  this  first  period 
served  also  to  make  possible  the  continuation  and  enhancement  of 
the  rise  which  marked  the  second  period.  The  enormous  loans  of 
the  government,  connected  as  they  were  with  mounting  bank  loans 
and  bank  deposits,  led  to  unmistakable  inflation.  That  term  is 
perhaps  not  fairly  applicable  to  the  first  period,  when  "natural" 
events,  not  government  action,  constituted  the  main  heightening 
force.  Certainly  during  the  second  period,  when  the  successive  loans 
of  the  government  had  such  far-reaching  effects  in  the  business  and 
financial  world,  there  was  plain  inflation.  And  that  inflation  could 
hardly  have  taken  place  to  so  great  an  extent  but  for  the  preceding 
inflow  and  accumulation  of  specie.  It  was  this  which  encouraged 
the  Federal  Reserve  Board  to  go  ahead  and  substitute  reserve  notes 
for  government  notes,  and  to  sanction  without  hesitation  the  ever- 
increasing  volume  of  bank  operations.  If  the  first  stage  had  come 
to  an  end  without  further  developments — if,  for  example,  the  war 
had  ceased  in  the  spring  of  191 7  and  the  United  States  had  never 
been  called  on  to  enter  it — the  lending  process,  if  continued  by 
private  agencies,  might  have  served  to  check  the  tide  of  rising 
prices  in  the  United  States.  As  matters  turned  out,  the  second 
stage,  during  which  the  United  States  entered  the  war  and  itself 
financed  the  international  loans  through  great  domestic  borrowings 
of  its  own,  was  characterized  not  by  any  maintenance  of  prices  at 
the  level  at  which  they  then  stood,  but  by  an  accelerated  and  accen- 
tuated upward  movement.  And  that  upward  movement,  it  need  not 
be  said,  did  not  cease  with  the  armistice  and  the  cessation  of  military 
operations.  The  government's  loans  to  the  Allies  and  the  peoples  of 
Europe  continued,  and  further  internal  loans  were  forthcoming. 

Through  it  all,  from  the  beginning  of  the  lending  operations  in 
191 5  to  their  close,  what  we  really  did  was  to  buy  from  each  other. 


THE  PRESENT  AND  FUTURE  211 

It  is  common  to  speak  of  our  enormous  exports  and  of  the  enormous 
foreign  demand  for  our  exports  as  if  these  were  causes  of  prosperity. 
The  plain  facts  are  that  the  foreign  demand  for  our  exports  and  the 
foreign  payment  for  our  exports  were  all  on  paper.  True,  the  for- 
eigners must  have  the  goods  and  must  pay  for  them.  But  the 
wherewithal  to  pay  for  them  was  furnished  to  the  foreigners  by  our 
own  people.  In  effect  the  payments  were  made  by  one  set  of  our 
own  people  to  another  set.  All  that  the  foreigners  really  did  was 
to  send  us  certificates  of  indebtedness  in  one  form  or  another — 
promises  to  pay,  which  will  have  an  influence  on  the  substance  of 
our  international  trade  only  in  the  years  to  come. 

This  state  of  things  cannot  persist.  The  process  of  ever-repeated 
loans  will  inevitably  come  to  an  end.  With  it  the  enormous  excess 
of  exports  over  imports  will  come  to  an  end.  No  rational  person 
can  suppose  that  such  an  abnormal  state  of  international  trade  as 
we  had  in  19 16-19  can  continue  indefinitely.  An  overturn  must 
come.  It  may  come  with  something  of  a  crash  and  with  the  familiar 
accompaniments  of  a  commercial  crisis.  We  may  fairly  expect,  how- 
ever, that  the  Federal  Reserve  System,  now  well  developed  and  well 
established,  will  serve  to  prevent  any  such  complete  collapse  of  the 
credit  structure  as  in  former  times  marked  the  beginning  of  a  new 
economic  cycle.  But  it  is  difficult  to  see  how  the  ordinary  accom- 
paniments of  such  an  overturn  are  to  be  avoided.  We  may  expect 
a  fall  in  prices  and  in  stock  exchange  securities,  industrial  depression, 
declining  prices,  and  declining  incomes.  He  would  be  rash  who 
would  venture  to  predict  how  great  or  how  long  would  be  the  de- 
pression, how  considerable  the  fall  in  prices.  It  is  hardly  to  be 
supposed  that  a  range  of  prices  as  low  as  that  of  the  pre-war  period 
will  be  reached  for  a  long  time  to  come.  But  all  indications  are 
that  we  shall  find  ourselves  below  the  maximum  of  the  present  and 
immediate  past.  An  essential  and  conspicuous  part  of  the  change 
will  be  the  readjustment  of  international  trade,  the  cessation  of  the 
artificial  and  necessarily  temporary  preponderance  of  exports,  and 
a  shift  both  in  imports  and  exports  such  as  to  bring  about  something 
like  a  normal  situation. 

What  now  will  this  readjusted  and  more  normal  condition  of 
international  trade  prove  to  be?  Prediction,  or  rather  speculation, 
will  best  proceed  by  comparing  the  several  factors  which  entered 


212  TAUSSIG 

into  our  international  trade  before  the  war  with  the  same  or  similar 
factors  as  they  may  be  expected  to  operate  during  the  years  to  come. 

The  continuing  excess  of  merchandise  exports  over  imports  dur- 
ing the  pre-war  period  is  again  a  familiar  phenomenon.  A  large 
''favorable"  balance  was  maintained  continuously  for  the  forty 
years  from  1873  to  1913.  It  served  to  meet  the  various  obligations 
which  the  people  of  the  United  States  incurred  to  those  of  foreign 
countries.  What  was  substantially  a  state  of  equilibrium  had  been 
attained.  The  merchandise  transactions  served  to  equalize  payments 
without  any  sustained  flow  of  specie  in  one  direction  or  the  other. 
The  movement  of  gold  was  merely  such  as  to  meet  the  fluctuations 
which  must  appear  in  individual  years,  and  left  the  supply  of  the 
United  States  untouched  except  so  far  as  it  was  increased  by  the 
accumulation  of  the  domestic  output  from  the  mines.  We  need  not 
stop  to  inquire  how  far  this  equilibrium  was  arrived  at  through  the 
process  which  the  orthodox  theory  of  international  trade  describes. 
For  myself  I  believe  in  the  main  that  it  was  so  reached.  But  reached 
it  was,  as  fully  as  is  likely  to  be  the  case  for  any  considerable  period. 
The  question  before  us  is  what  new  sort  of  equilibrium  may  be 
expected  during  the  period  to  come.  Allowance  must  always  be 
made  for  fluctuations  or  irregularities  in  individual  years ;  we  are 
concerned  with  the  general  trend. 

The  main  ''invisible"  items  which  affected  our  international 
trade  and  international  payments  during  the  pre-war  period  were 
four  ;  tourists'  expenditures,  immigrants'  remittances,  freight  charges, 
and  interest  and  profits  payable  to  foreigners.  What  can  be  said 
of  the  probable  increase  or  decrease  of  these  several  items  in  years 
to  come? 

Tourists'  expenditures  seem  likely  to  become  larger.  During  the 
pre-war  period  it  was  supposed  that  they  amounted  to  an  average 
of  about  $150,000,000  a  year.  With  the  growth  of  wealth  and  popu- 
lation they  would  be  likely  to  increase  under  any  circumstances. 
For  some  years  to  come  they  would  seem  likely  to  increase  at  even 
more  than  the  normal  rate.  During  four  years  no  tourists  have  gone 
abroad  ;  there  is  an  accumulation  of  persons  looking  forward  to  a 
first  trip  or  to  a  repetition  of  previous  trips.  A  wish  to  see  the  sites 
of  war  will  add  to  the  exodus.  No  doubt  the  greater  or  less  activity  of 
business  and  the  greater  or  less  prosperity  dependent  upon  business 


THE  PRESENT  AND  FUTURE  213 

changes  will  cause  the  movement  to  fluctuate  from  year  to  year. 
But  on  the  whole  it  may  be  expected  to  be  substantially  larger  than 
in  the  past.  There  will  ensue  a  consequent  need  of  increasing 
remittances  to  foreign  countries. 

A  similar  tendency  may  be  expected  in  remittances  made  by  immi- 
grants. These  were  an  astonishingly  large  item  during  the  decade 
preceding  the  war.  The  annual  amount  sent  out  was  something 
like  $200,000,000  a  year.  In  the  popular  mind  this  was  conceived 
as  so  much  cash  and  was  spoken  of  (in  that  mercantilist  fashion 
which  it  seems  impossible  to  uproot)  as  the  loss  of  so  much  wealth 
to  the  country.  In  effect  it  meant  that  the  Italians,  the  Irish,  the 
Poles,  and  the  Greeks  supplied  the  wherewithal  for  buying  American 
cotton  and  grain  and  iron  and  copper — goods  which  were  exported 
and  the  proceeds  of  whose  sale  abroad  enabled  payments  to  be  made 
to  the  relatives  in  the  far-distant  countries.  That  process  probably 
will  be  resumed  and  enlarged,  at  least  for  some  years  to  come.  The 
United  States  will  be  more  prosperous  than  European  countries. 
The  call  for  aid  from  relatives  and  parents  will  be  more  appealing 
than  ever. 

It  must  be  admitted,  however,  that  prediction  in  this  matter  is 
rash.  Now  that  the  illiteracy  test  is  in  effect,  the  bird  of  passage 
immigrant  will  be  a  less  important  figure  than  before,  and  less  will 
be  taken  home  by  his  kind  than  was  formerly  the  case.  The  same 
factor  will  militate  against  another  type  of  remittance,  namely,  that 
by  which  "money"  was  sent  abroad  for  enabling  relatives  to  join 
those  already  established  here.  Perhaps  too  the  return  movement  of 
those  immigrants  who,  though  not  birds  of  passage  in  the  strict 
sense,  nevertheless  return  to  the  old  country  with  their  earnings 
after  having  sojourned  in  the  United  States  for  a  number  of  years, 
will  be  less  in  consequence  of  the  uneasy  conditions  likely  to  prevail 
on  the  Continent  for  some  years  to  come.  Stable  political  and 
social  conditions  in  Europe,  on  the  other  hand,  will  tend  to  make 
this  movement  larger.  Everyone  is  at  liberty  to  make  his  own  guess. 
It  is  quite  within  the  bounds  of  possibility  that  after  all  this  factor 
during  the  next  ten  years  will  prove  to  be  not  of  greater  quantitative 
importance  than  before  the  war,  but  of  less. 

Next  as  regards  shipping.  The  case  here  is  clearer.  The  United 
States  has  embarked  on  a  great  scale  in  shipping  enterprises,  and 


214  TAUSSIG 

for  some  years  freight  charges  will  no  longer  constitute  a  debit 
item.  Probably  they  will  also  not  constitute  a  credit  item.  Our 
imports  and  exports  will  not  be  carried  exclusively  in  American 
ships ;  they  will  be  carried  both  in  American  and  in  foreign.  ,  ,  . 
Something  will  need  to  be  paid  by  us  to  foreign  countries  on  freight 
account,  and  something  will  be  received  by  American  shipowners  on 
that  account.  The  two  sides  of  the  item  will  approximately  balance. 
At  all  events,  no  such  debit  charge  as  that  of  pre-war  times  will  have 
to  be  met. 

Most  predictable  of  all  is  the  nature  of  the  change  that  will  take 
place  in  the  interest  and  profits  account.  Here  something  like  a 
complete  reversal  would  seem  to  be  inevitable.  In  the  oft  repeated 
phrase,  the  United  States  is  no  longer  a  debtor  country  but  a  creditor 
country.  The  remittances  on  this  score  will  be  preponderantly  to 
the  United  States,  not  out  of  the  United  States.  But  the  quantita- 
tive result  is  impossible  to  gauge.  Unquestionably  there  will  be  a 
sharp  reduction  in  interest  remittances  from  the  United  States  to 
foreign  countries,  perhaps  so  great  as  to  amount  virtually  to  com- 
plete cessation.  The  remittances  on  the  other  hand  from  Europe 
to  the  United  States  on  interest  account  will  be  heavy.  The  great 
items  will  be  those  arising  from  public  remittances — from  the  loans 
which  European  governments  have  contracted,  whether  to  our  own 
government  or  directly  to  our  investing  public.  The  possibility  can- 
not be  excluded  that  the  interest  charges  due  to  our  government  may 
be  postponed,  conceivably  even  forgiven  entirely.  But  the  balance 
on  interest  account,  whatever  its  amount  may  be,  will  cause  remit- 
tances to  be  made  to  the  United  States,  not  from  the  United  States, 
and  therefore  will  tend,  so  far  as  this  item  is  concerned,  to  bring  an 
excess  of  merchandise  imports  and  no  longer  an  excess  of  mer- 
chandise exports. 

A  further  item  to  be  considered  is  the  international  movement  on 
capital  account.  Before  the  war  the  United  States  was  still,  on  the 
whole,  a  borrowing  country.  It  is  true  that  the  process  of  making 
investments  abroad,  more  particularly  in  non-European  countries, 
had  already  set  in.  But  the  net  transactions  on  capital  account  had 
been  such  as  to  leave  the  United  States  a  borrowing  country,  and  to 
make  this  item  a  credit  one  in  our  international  account.    A  common 


THE  PRESENT  AND  FUTURE  215 

popular  fallacy  on  this  score  is  that  a  "borrowing"  or  "debtor" 
country  necessarily  has  an  excess  of  exports,  a  lending  or  "creditor" 
country  an  excess  of  imports.  Such  is  the  case,  as  needs  hardly  be 
said  to  the  conversant  reader,  only  when  a  country  has  been  in  the 
creditor  position  for  a  prolonged  period,  even  for  generations.  Dur- 
ing the  earlier  stages  of  lending  or  of  being  a  creditor  country,  the 
effect  on  international  trade  is  precisely  the  reverse  of  that  so  often 
assumed  in  popular  discussion.  During  this  earlier  stage  the  lending 
country  has  an  excess  of  exports,  the  borrowing  country  an  excess 
of  imports.  Only  when,  as  in  the  familiar  cases  of  Great  Britain  and 
France  during  the  last  half  of  the  nineteenth  century,  the  processes 
of  lending  and  borrowing  have  been  maintained  for  many  years, 
does  the  creditor  country  show  a  balance  of  merchandise  imports ; 
and  only  when  the  borrowing  country  has  been  a  borrower  for  a 
long  period,  does  it  have  a  balance  of  merchandise  exports. 

Obviously  the  recent  changes  of  the  United  States  in  this  regard 
have  been  quite  extraordinary  and  unprecedented.  We  have  jumped 
during  the  short  period  of  three  years  from  one  position  to  another 
quite  the  reverse.  A  shift  which  would  be  expected  to  require  at 
least  a  generation  has  been  made  in  a  triennium.  There  has  been  a 
sudden  reversal,  not  a  gradual  transition.  Now  that  the  main  shift 
has  taken  place,  there  may  be  complementary  changes,  and  more 
especially  a  flow  of  investment  and  consequent  remittance  to  foreign 
countries.  Standing  alone,  such  remittance  on  capital  account  would 
lead  to  an  excess  of  merchandise  exports  from  the  United  States. 
Side  by  side  with  it,  however,  will  be  the  process  of  remittances  to 
the  United  States  from  foreign  countries  on  interest  account.  What 
will  be  the  quantitative  balance  between  the  two  no  one  can  ven- 
ture to  predict.  I  do  not  myself  look  forward  to  so  vast  or  rapid 
increase  in  American  investments  in  foreign  countries  as  do  some 
of  our  financial  writers  and  experts.  It  is  obvious  that  the  process 
cannot  possibly  be  maintained  on  anything  like  the  scale  of  the  last 
year  or  two,  nor  can  it  lead  to  merchandise  exports  on  the  same 
scale.  The  most  that  can  be  expected  from  our  becoming  a  lending 
country  is  a  partial  offset  to  the  other  side  of  the  account,  namely 
that  by  which  interest  and  profits  will  have  to  be  remitted  from 
foreign  countries  to  our  own  shores. 


2i6  TAUSSIG 

Speculative  as  must  be  the  outcome  for  each  of  these  four  items, 
the  final  outcome  for  our  international  trade  as  a  whole  necessarily 
is  still  more  speculative.  The  best  guess  would  seem  to  be  that  the 
United  States  will  maintain  an  excess  of  merchandise  exports,  but 
not  so  great  an  excess  as  that  which  characterized  the  twenty  years 
preceding  the  war.  We  shall  have  a  favorable  "balance  of  trade," 
but  one  not  so  favorable  as  before.  Our  prosperity  boomers  will  not 
be  able  to  speak  so  unctuously  of  our  great  reserves  of  credit  abroad 
and  our  great  accumulations  of  resources.  Needless  to  say,  there 
will  be  marked  variations  from  year  to  year.  There  will  be  the 
recurring  seasonal  fluctuations  in  the  crops,  and  there  will  be  shifts 
in  financial  and  industrial  conditions.  Very  possibly  some  years 
will  show  an  excess  of  imports,  others  an  unusual  excess  of  exports. 
Looking  over  the  ten  years  from  1920  to  1930  the  outlook  is  for 
some  continuing  excess  of  merchandise  exports  over  merchandise 
imports.  But  it  would  seem  impossible  that  the  annual  excess  should 
be  on  the  average  at  all  so  great  as  that  of  the  decades  preceding  the 
war.  In  the  end — supposing  no  new  factors  to  enter  before  this 
final  stage  is  reached — the  accumulation  of  interest  payments  will 
bring  about  an  excess  of  imports. 

Still  another  set  of  questions  arises.  What  may  be  expected  to  be 
the  course  of  prices  in  the  United  States,  and  what  the  course  of 
money  incomes? 

First,  the  theory  of  the  matter.  In  general  it  is  to  be  expected  that 
during  a  process  of  expanding  imports  a  country  will  have  prices 
relatively  high.  It  is  only  when  the  conditions  for  sale  within  a 
country  are  favorable  that  imports  can  be  expected  to  enlarge. 
Conversely,  a  process  of  expanding  exports  may  be  expected  to  be 
coincident  with  a  period  of  prices  relatively  low.  Exports  obviously 
are  promoted  when  the  conditions  within  a  country  are  favorable 
for  purchase. 

These  general  statements  need  a  word  of  explanation.  The  terms 
"high  prices"  and  "low  prices,"  when  used  in  this  connection,  have 
reference  to  previous  conditions  within  the  same  country,  and  make 
no  comparison  with  other  countries.  An  increase  of  imports  in  a 
given  country  is  induced  by  prices  higher  than  they  were  before  in 
that  country ;   which  does  not  necessarily  mean  a  range  of  prices 


THE  PRESENT  AND  FUTURE  217 

higher  than  elsewhere.  Increasing  exports,  conversely,  are  stimu- 
lated by  prices  lower  than  they  were  before  in  the  same  country ; 
which  again  does  not  necessarily  mean  that  the  general  range  of 
prices  in  that  country  is  lower  than  elsewhere.  It  is  obvious  that 
the  prices  of  the  particular  articles  that  enter  into  international 
trade — they  may  be  styled  the  ''international  commodities" — 
whether  they  be  imported  or  exported,  will  be  substantially  the  same 
(barring  transportation  charges  and  customs  duties)  throughout 
the  several  trading  countries.  Their  movement  from  one  country 
to  another  will  be  affected  by  the  general  course  of  other  prices  and 
of  money  incomes  within  the  several  countries.  This  course  will  be 
upward  or  downward  within  each  country,  both  for  the  international 
commodities  and  for  those  solely  within  the  range  of  domestic 
transactions,  in  sympathy  with  the  general  conditions  of  international 
trade.  A  general  upward  swing  tempts  imports ;  a  downward  swing 
stimulates  exports.  True,  the  inflowing  imports  operate  to  check  the 
rise,  but  they  continue  until  it  is  checked.  And  conversely,  while 
the  outgoing  exports  operate  to  check  the  fall,  they  continue  until 
the  check  does  come. 

Lending  operations,  alone  and  by  themselves,  signify  a  tendency 
to  increasing  exports  induced  by  prices  comparatively  low.  Bor- 
rowing, on  the  other  hand,  means  in  the  same  way  a  tendency  to 
increasing  imports  induced  by  prices  comparatively  high.  "Alone 
and  by  themselves" — in  this  sense  and  subject  to  this  restriction 
the  propositions  hold  good.  A  country  whose  trade  has  been  in 
equilibrium,  which  starts  on  a  lending  career,  and  in  which  no  other 
new  factors  affect  the  situation,  must  make  remittances  to  foreign 
parts,  and  soon  will  reach  the  stage  of  effecting  them  through  the 
export  of  goods.  A  country  which  under  similar  conditions  starts 
on  a  borrowing  career  will  soon  reach  the  stage  of  increasing  imports 
tempted  by  rising  prices,  and  will  soon  have  an  "unfavorable" 
trade  balance. 

Consider  now  the  way  in  which  these  opposite  transactions  for- 
merly took  place  in  the  United  States,  and  the  way  in  which  they  are 
likely  to  take  place  in  the  future.  During  the  pre-war  period  the 
United  States  still  was  a  borrowing  country.  Thereby  it  was  under 
the  influence  of  a  factor  which,  so  far  as  it  went,  promoted  advancing 


2i8  TAUSSIG 

prices  and  imports.  On  the  other  hand,  as  has  already  been  ex- 
plained, during  this  same  period  there  were  preponderant  other 
factors,  among  them  the  accumulated  interest  on  old  loans,  work- 
ing in  the  opposite  direction.  Our  borrowing,  at  all  events,  may  now 
be  expected  to  cease.  If  there  be  new  transactions  on  capital  account, 
they  will  be  rather  in  the  opposite  direction.  The  fresh  loans  will 
be  from  the  United  States,  not  to  the  United  States.  And  yet  in 
this  reversed  case,  the  net  outcome  of  international  financing  is  likely 
again  to  be  that  other  factors  will  outweigh  and  completely  counter- 
act the  new  transactions  on  capital  account.  Just  as  interest  remit- 
tances from  the  United  States  on  account  of  past  loans  had  offset 
the  pre-war  borrowing,  so  interest  remittances  to  the  United  States 
will  probably  offset  post-war  lending.  So  rapid  and  enormous  have 
been  the  loans  of  the  war  period  that  the  interest  remittances  one 
way  are  likely  to  exceed  the  capital  remittances  the  other.  The  net 
outcome  of  the  international  lending  in  both  cases  proves  to  be  such 
as  to  cancel  the  effect  which  borrowing  alone  would  have.  The  bal- 
ance, as  regards  this  connected  pair  of  operations,  will  be  the  other 
way  from  what  it  was  before  the  war.  International  credit  opera- 
tions will  tend  to  rising  prices  and  swelling  imports. 

In  other  words,  the  extraordinary  overturn  in  credit  relations 
means  the  disappearance  of  what  was  formerly  an  export-inducing 
factor.  Remittances  will  no  longer  have  to  be  made  in  anything 
like  the  volume  of  pre-war  times  from  the  United  States  to  Europe 
on  account  of  interest  and  profits  derived  from  foreign  investments  in 
this  country.  The  only  way  in  which  international  financing  might 
continue  to  work  in  this  same  direction  would  be  through  large 
fresh  loans  on  capital  account  from  the  United  States  to  European 
countries;  in  other  words,  through  a  reversal  of  our  position  not 
only  on  income  account,  but  on  capital  account  as  well.  I  have 
already  expressed  my  skepticism  with  regard  to  the  common  expecta- 
tion that  loans  will  be  made  by  the  United  States  on  a  great  scale 
during  the  immediate  future,— no  longer  for  purposes  connected 
with  the  war  but  for  the  ordinary  purposes  of  investment.  Doubtless 
there  will  be  a  considerable  flare-up  of  such  advances  during  the 
first  stage  of  post-war  dealings;  thereafter  probably  a  slackened 
movement.    No  one  can  predict  what  proportions  transactions  of 


THE  PRESENT  AND  FUTURE  219 

this  kind  will  assume.  In  their  absence,  or  in  the  event  of  their 
assuming  no  vast  dimensions,  the  outcome  of  the  sudden  change 
from  a  debtor  to  a  creditor  position,  through  its  combined  influence 
on  principal  and  interest,  will  be,  to  repeat,  in  the  direction  of  in- 
creasing imports  and  rising  prices. 

The  entire  series  of  changes  which  thus  result  from  the  shift  of 
the  United  States  from  a  debtor  to  a  creditor  position  are  quite 
beyond  the  range  of  experience.  In  all  past  operations  of  the  kind, 
such  transitions  have  been  spread  over  a  period  of  many  years, 
indeed  over  generations.  With  us  the  change  has  taken  place 
abruptly.  The  corresponding  change  in  our  merchandise  balance 
and  in  our  general  international  balance  has  not  yet  been  effected. 
The  readjustment  of  international  trade  to  the  new  conditions 
must  still  be  awaited.  And  this  readjustment,  which  is  the  real 
and  substantial  one,  cannot  take  place  with  the  same  abruptness  as 
the  financial  shift  which  is  its  impelling  cause.  Some  years  are 
likely  to  elapse  before  a  new  and  fairly  stable  equilibrium  of  mer- 
chandise balances  is  reached.  And  during  this  period,  it  need  hardly 
be  said,  new  forces  may  enter  or  old  ones  may  become  stronger  or 
weaker.  The  ultimate  outcome  will  be  the  result  of  many  and 
interwoven  factors. 

One  element  in  the  situation  has  an  influence  peculiarly  difficult 
of  prediction.  This  is  the  underlying  and  dominant  one  of  the  de- 
mand for  international  commodities  in  the  United  States  on  the 
one  hand,  in  foreign  countries  on  the  other.  The  foreign  demand 
for  our  goods  may  become  keener,  our  own  demand  for  foreign  goods 
less  keen.  Or  precisely  the  opposite  combination  may  appear :  our 
demand  for  foreign  goods  may  become  keener  and  their  demand  for 
ours  less  keen.  I  suspect  that  during  the  pre-war  period,  and  indeed 
throughout  the  period  from  1873  to  1913,  the  foreign  demand  for 
our  goods  was  not  only  great,  but  was  tending  to  become  greater 
year  by  year.  It  was  this  circumstance  which  seems  to  have  made  it 
comparatively  easy  for  the  United  States  to  meet  the  heavy  inter- 
national debit  charges  of  that  period.  During  the  war,  further,  the 
foreign  demand  for  our  goods  was  abnormal,  almost  insatiable. 
And  so  it  has  remained  also  during  the  period  immediately  succeed- 
ing the  war.    But  what  will  be  the  situation  when  the  world  once 


220  TAUSSIG 

again  settles  down?  What  is  to  be  expected  two  or  three  years 
from  now,  what  five  or  ten  years  from  now?  It  is  certain  that 
nothing  hke  the  demand  of  the  war  period  is  to  be  expected  under 
the  conditions  of  peace.  It  would  seem  probable,  in  view  of  the 
industrial  conditions  to  be  foreseen  for  the  next  decade  or  two,  that 
there  will  be  relaxation  as  compared  with  the  intensive  demand  of 
the  pre-war  period.  European  countries  will  go  through  a  long  and 
trying  period  of  recuperation  and  economy.  Their  demand  for 
American  goods  promises  at  most  only  to  equal  in  intensity  that  of 
the  pre-war  period.  On  this  score  we  can  hardly  expect  a  turn  of 
events  such  as  will  offset  the  less  unpredictable  changes  noted  in  the 
preceding  paragraphs. 


PART  II 

FREE  TRADE  AND  PROTECTION 

VIII 

SMITH:  OF  THE  PRINCIPLE  OF  THE  COMMERCIAL, 
OR  MERCANTILE  SYSTEM^ 

*********** 

THAT  wealth  consists  in  money,  or  in  gold  and  silver,  is  a 
popular  notion  which  naturally  arises  from  the  double  function 
of  money,  as  the  instrument  of  commerce  and  as  the  measure  of 
value.  In  consequence  of  its  being  the  instrument  of  commerce, 
when  we  have  money  we  can  more  readily  obtain  whatever  else  we 
have  occasion  for  than  by  means  of  any  other  commodity.  The 
great  affair,  we  always  find,  is  to  get  money.  When  that  is  ob- 
tained, there  is  no  difficulty  in  making  any  subsequent  purchase. 
In  consequence  of  its  being  the  measure  of  value,  we  estimate  that 
of  all  other  commodities  by  the  quantity  of  money  which  they  will 
exchange  for.  We  say  of  a  rich  man  that  he  is  worth  a  great  deal, 
and  of  a  poor  man  that  he  is  worth  very  little  money.  A  frugal  man, 
or  a  man  eager  to  be  rich,  is  said  to  love  money ;  and  a  careless,  a 
generous,  or  a  profuse  man,  is  said  to  be  indifferent  about  it.  To 
grow  rich  is  to  get  money ;  and  wealth  and  money,  in  short,  are, 
in  common  language,  considered  as  in  every  respect  synonymous. 

A  rich  country,  in  the  same  manner  as  a  rich  man,  is  supposed 
to  be  a  country  abounding  in  money ;  and  to  heap  up  gold  and 
silver  in  any  country  is  supposed  to  be  the  readiest  way  to  enrich 
it.  For  some  time  after  the  discovery  of  America,  the  first  inquiry 
of  the  Spaniards,  when  they  arrived  upon  any  unknown  coast,  used  to 
be,  if  there  was  any  gold  or  silver  to  be  found  in  the  neighbourhood. 

^-Adam  Smith  (1723-1790),  Wealth  of  Nations  (1776),  Bk.  IV,  chap.  i. 

221 


222  SMITH 

By  the  information  which  they  received,  they  judged  whether  it 
was  worth  while  to  make  a  settlement  there,  or  if  the  country  was 
worth  the  conquering.  Piano  Car'pino,  a  monk,  sent  ambassador 
from  the  King  of  France  to  one  of  the  sons  of  the  famous  Gengis 
Khan,  says  that  the  Tartars  used  frequently  to  ask  him  if  there 
was  plenty  of  sheep  and  oxen  in  the  kingdom  of  France?  Their 
inquiry  had  the  same  object  with  that  of  the  Spaniards.  They 
wanted  to  know  if  the  country  was  rich  enough  to  be  worth  the 
conquering.  Among  the  Tartars,  as  among  all  other  nations  of 
shepherds,  who  are  generally  ignorant  of  the  use  of  money,  cattle  are 
the  instruments  of  commerce  and  the  measures  of  value.  Wealth, 
therefore,  according  to  them,  consisted  in  cattle,  as  according  to  the 
Spaniards  it  consisted  in  gold  and  silver.  Of  the  two,  the  Tartar 
notion,  perhaps,  was  the  nearest  to  the  truth. 

Mr.  Locke  remarks  a  distinction  between  money  and  other  mov- 
able goods.  All  other  movable  goods,  he  says,  are  of  so  consumable 
a  nature  that  the  wealth  which  consists  in  them  cannot  be  much 
depended  on,  and  a  nation  which  abounds  in  them  one  year  may, 
without  any  exportation,  but  merely  by  their  own  waste  and  extrava- 
gance, be  in  great  want  of  them  the  next.  Money,  on  the  contrary, 
is  a  steady  friend,  which,  though  it  may  travel  about  from  hand  to 
hand,  yet  if  it  can  be  kept  from  going  out  of  the  country,  is  not 
very  liable  to  be  wasted  and  consumed.  Gold  and  silver,  therefore, 
are,  according  to  him,  the  most  solid  and  substantial  part  of  the 
movable  wealth  of  a  nation,  and  to  multiply  those  metals  ought,  he 
thinks,  upon  that  account,  to  be  the  great  object  of  its  political 
economy. 

Others  admit  that  if  a  nation  could  be  separated  from  all  the 
world,  it  would  be  of  no  consequence  how  much,  or  how  little  money 
circulated  in  it.  The  consumable  goods  which  were  circulated  by 
means  of  this  money  would  only  be  exchanged  for  a  greater  or  a 
smaller  number  of  pieces ;  but  the  real  wealth  or  poverty  of  the 
country,  they  allow,  would  depend  altogether  upon  the  abundance 
or  scarcity  of  those  consumable  goods.  But  it  is  otherwise,  they 
think,  with  countries  which  have  connections  with  foreign  nations, 
and  which  are  obliged  to  carry  on  foreign  wars,  and  to  maintain 
fieets  and  armies  in  distant  countries.  This,  they  say,  cannot  be 
done,  but  by  sending  abroad  money  to  pay  them  with ;  and  a  nation 


COMMERCIAL  OR  MERCANTILE  SYSTEM  223 

cannot  send  much  money  abroad  unless  it  has  a  good  deal  at  home. 
Every  such  nation,  therefore,  must  endeavour  in  time  of  peace  to 
accumulate  gold  and  silver  that,  when  occasion  requires,  it  may 
have  wherewithal  to  carry  on  foreign  wars. 

In  consequence  of  these  popular  notions,  all  the  different  nations 
of  Europe  have  studied,  though  to  little  purpose,  every  possible 
means  of  accumulating  gold  and  silver  in  their  respective  countries. 
Spain  and  Portugal,  the  proprietors  of  the  principal  mines  which 
supply  Europe  with  those  metals,  have  either  prohibited  their 
exportation  under  the  severest  penalties,  or  subjected  it  to  a  con- 
siderable duty.  The  like  prohibition  seems  anciently  to  have  made 
a  part  of  the  policy  of  most  other  European  nations.  It  is  even  to 
be  found,  where  we  should  least  of  all  expect  to  find  it,  in  some  old 
Scotch  acts  of  parliament,  which  forbid  under  heavy  penalties  the 
carrying  gold  or  silver  jorth  of  the  kingdom.  The  like  policy 
anciently  took  place  both  in  France  and  England. 

When  those  countries  became  commercial,  the  merchants  found 
this  prohibition,  upon  many  occasions,  extremely  inconvenient.  They 
could  frequently  buy  more  advantageously  with  gold  and  silver 
than  with  any  other  commodity  the  foreign  goods  which  they 
wanted,  either  to  import  into  their  own,  or  to  carry  to  some  other 
foreign  country.  They  remonstrated,  therefore,  against  this  prohi- 
bition as  hurtful  to  trade. 

They  represented,  first,  that  the  exportation  of  gold  and  silver 
in  order  to  purchase  foreign  goods,  did  not  always  diminish  the 
quantity  of  those  metals  in  the  kingdom.  That,  on  the  contrary,  it 
might  frequently  increase  that  quantity ;  because,  if  the  consumption 
of  foreign  goods  was  not  thereby  increased  in  the  country,  those 
goods  might  be  re-exported  to  foreign  countries,  and,  being  there 
sold  for  a  large  profit,  might  bring  back  much  more  treasure  than 
was  originally  sent  out  to  purchase  them.  Mr.  Mun  compares  this 
operation  of  foreign  trade  to  the  seed-time  and  harvest  of  agricul- 
ture. "If  we  only  behold,"  says  he,  "the  actions  of  the  husband- 
man in  the  seed-time,  when  he  casteth  away  much  good  corn  into 
the  ground,  we  shall  account  him  rather  a  madman  than  a  husband- 
man. But  when  we  consider  his  labours  in  the  harvest,  which  is  the 
end  of  his  endeavours,  we  shall  find  the  worth  and  plentiful  increase 
of  his  actions." 


2  24  SMITH 

They  represented,  secondly,  that  this  prohibition  could  not  hinder 
the  exportation  of  gold  and  silver,  which,  on  account  of  the  small- 
ness  of  their  bulk  in  proportion  to  their  value,  could  easily  be 
smuggled  abroad.  That  this  exportation  could  only  be  prevented 
by  a  proper  attention  to,  what  they  called,  the  balance  of  trade. 
That  when  the  country  exported  to  a  greater  value  than  it  imported, 
a  balance  became  due  to  it  from  foreign  nations,  which  was  neces- 
sarily paid  to  it  in  gold  and  silver,  and  thereby  increased  the 
quantity  of  those  metals  in  the  kingdom.  But  that  when  it  imported 
to  a  greater  value  than  it  exported,  a  contrary  balance  became  due 
to  foreign  nations,  which  was  necessarily  paid  to  them  in  the  same 
manner,  and  therebj^  diminished  that  quantity.  That  in  this  case 
to  prohibit  the  exportation  of  those  metals  could  not  prevent  it, 
but  only,  by  making  it  more  dangerous,  render  it  more  expensive. 
That  the  exchange  was  thereby  turned  more  against  the  country 
which  owed  the  balance  than  it  otherwise  might  have  been ;  the 
merchant  who  purchased  a  bill  upon  the  foreign  country  being 
obliged  to  pay  the  banker  who  sold  it,  not  only  for  the  natural 
risk,  trouble,  and  expense  of  sending  the  money  thither,  but  for  the 
extraordinary  risk  arising  from  the  prohibition.  But  that  the  more 
the  exchange  was  against  any  country,  the  more  the  balance  of 
trade  became  necessarily  against  it ;  the  money  of  that  country 
becoming  necessarily  of  so  much  less  value  in  comparison  with  that 
of  the  country  to  which  the  balance  was  due.  That  if  the  exchange 
between  England  and  Holland,  for  example,  was  five  per  cent,  against 
England,  it  would  require  a  hundred  and  five  ounces  of  silver  in 
England  to  purchase  a  bill  for  a  hundred  ounces  of  silver  in  Hol- 
land :  that  a  hundred  and  five  ounces  of  silver  in  England,  there- 
fore, would  be  worth  only  a  hundred  ounces  of  silver  in  Holland, 
and  would  purchase  only  a  proportionable  quantity  of  Dutch  goods ; 
but  that  a  hundred  ounces  of  silver  in  Holland,  on  the  contrary, 
would  be  worth  a  hundred  and  five  ounces  in  England,  and  would 
purchase  a  proportionable  quantity  of  English  goods :  that  the 
English  goods  which  were  sold  to  Holland  would  be  sold  so  much 
cheaper ;  and  the  Dutch  goods  which  were  sold  to  England  so 
much  dearer  by  the  difference  of  the  exchange ;  that  the  one  would 
draw  so  much  less  Dutch  money  to  England,  and  the  other  so  much 


COMMERCIAL  OR  MERCANTILE  SYSTEM  225 

more  English  money  to  Holland,  as  this  difference  amounted  to :  and 
that  the  balance  of  trade,  therefore,  would  necessarily  be  so  much 
more  against  England,  and  would  require  a  greater  balance  of  gold 
and  silver  to  be  exported  to  Holland. 

Those  arguments  were  partly  solid  and  partly  sophistical.  They 
were  solid  so  far  as  they  asserted  that  the  exportation  of  gold  and 
silver  in  trade  might  frequently  be  advantageous  to  the  country. 
They  were  solid,  too,  in  asserting  that  no  prohibition  could  prevent 
their  exportation  when  private  people  found  any  advantage  in  ex- 
porting them.  But  they  were  sophistical  in  supposing  that  either  to 
preserve  or  to  augment  the  quantity  of  those  metals  required  more 
the  attention  of  government  than  to  preserve  or  to  augment  the 
quantity  of  any  other  useful  commodities,  which  the  freedom  of 
trade,  without  any  such  attention,  never  fails  to  supply  in  the  proper 
quantity.  They  were  sophistical  too,  perhaps,  in  asserting  that  the 
high  price  of  exchange  necessarily  increased  what  they  called  the 
unfavourable  balance  of  trade,  or  occasioned  the  exportation  of  a 
greater  quantity  of  gold  and  silver.  That  high  price,  indeed,  was 
extremely  disadvantageous  to  the  merchants  who  had  any  money 
to  pay  in  foreign  countries.  They  paid  so  much  dearer  for  the  bills 
which  their  bankers  granted  them  upon  those  countries.  But  though 
the  risk  arising  from  the  prohibition  might  occasion  some  extraor- 
dinary expense  to  the  bankers,  it  would  not  necessarily  carry  any 
more  money  out  of  the  country.  This  expense  would  generally  be 
all  laid  out  in  the  country,  in  smuggling  the  money  out  of  it,  and 
could  seldom  occasion  the  exportation  of  a  single  sixpence  beyond 
the  precise  sum  drawn  for.  The  high  price  of  exchange  too  would 
naturally  dispose  the  merchants  to  endeavour  to  make  their  exports 
nearly  balance  their  imports,  in  order  that  they  might  have  this  high 
exchange  to  pay  upon  as  small  a  sum  as  possible.  The  high  price  of 
exchange,  besides,  must  necessarily  have  operated  as  a  tax,  in  rais- 
ing the  price  of  foreign  goods,  and  thereby  diminishing  their  con- 
sumption. It  would  tend,  therefore,  not  to  increase  but  to  diminish 
what  they  called  the  unfavourable  balance  of  trade,  and  conse- 
quently the  exportation  of  gold  and  silver. 

Such  as  they  were,  however,  those  arguments  convinced  the  people 
to  whom  they  were  addressed.    They  were  addressed  by  merchants 


226  SMITH 

to  parliaments  and  to  the  councils  of  princes,  to  nobles  and  to  coun- 
try gentlemen,  by  those  who  were  supposed  to  understand  trade  to 
those  who  were  conscious  to  themselves  that  they  knew  nothing 
about  the  matter.  That  foreign  trade  enriched  the  country,  experi- 
ence demonstrated  to  the  nobles  and  country  gentlemen  as  well  as 
to  the  merchants ;  but  how,  or  in  what  manner,  none  of  them  well 
knew.  The  merchants  knew  perfectly  in  what  manner  it  enriched 
themselves.  It  was  their  business  to  know  it.  But  to  know  in  what 
manner  it  enriched  the  country  was  no  part  of  their  business.  This 
subject  never  tame  into  their  consideration  but  when  they  had 
occasion  to  apply  to  their  country  for  some  change  in  the  laws 
relating  to  foreign  trade.  It  then  became  necessary  to  say  some- 
thing about  the  beneficial  effects  of  foreign  trade,  and  the  manner 
in  which  those  effects  were  obstructed  by  the  laws  as  they  then 
stood.  To  the  judges  who  were  to  decide  the  business  it  appeared 
a  most  satisfactory  account  of  the  matter,  when  they  were  told  that 
foreign  trade  brought  money  into  the  country,  but  that  the  laws  in 
question  hindered  it  from  bringing  so  much  as  it  otherwise  would  do. 
Those  arguments  therefore  produced  the  wished-for  effect.  The 
prohibition  of  exporting  gold  and  silver  was  in  France  and  England 
confined  to  the  coin  of  those  respective  countries.  The  exportation 
of  foreign  coin  and  of  bullion  was  made  free.  In  Holland,  and  in 
some  other  places,  this  liberty  was  extended  even  to  the  coin  of  the 
country.  The  attention  of  government  was  turned  away  from  guard- 
ing against  the  exportation  of  gold  and  silver  to  watch  over  the 
balance  of  trade  as  the  only  cause  which  could  occasion  any  augmen- 
tation or  diminution  of  those  metals.  From  one  fruitless  care  it 
was  turned  away  to  another  care  much  more  intricate,  much  more 
embarrassing,  and  just  equally  fruitless.  The  title  of  Mun's  book, 
England's  Treasure  in  Foreign  Trade,  became  a  fundamental  maxim 
in  the  political  economy,  not  of  England  only,  but  of  all  other  com- 
mercial countries.  The  inland  or  home  trade,  the  most  important 
of  all,  the  trade  in  which  an  equal  capital  affords  the  greatest 
revenue,  and  creates  the  greatest  employment  to  the  people  of  the 
country,  was  considered  as  subsidiary  only  to  foreign  trade.  It 
neither  brought  money  into  the  country,  it  was  said,  nor  carried 
any  out  of  it-    The  country,  therefore,  could  never  become  either 


COMMERCIAL  OR  MERCANTILE  SYSTEM  227 

richer  or  poorer  by  means  of  it,  except  so  far  as  its  prosperity  or 
decay  might  indirectly  influence  the  state  of  foreign  trade. 

A  country  that  has  no  mines  of  its  own  must  undoubtedly  draw 
its  gold  and  silver  from  foreign  countries  in  the  same  manner  as 
one  that  has  no  vineyards  of  its  own  must  draw  its  wines.  It  does 
not  seem  necessary,  however,  that  the  attention  of  government 
should  be  more  turned  towards  the  one  than  towards  the  other  object. 
A  country  that  has  wherewithal  to  buy  wine  will  always  get  the  wine 
which  it  has  occasion  for ;  and  a  country  that  has  wherewithal  to 
buy  gold  and  silver  will  never  be  in  want  of  those  metals.  They  are 
to  be  bought  for  a  certain  price  like  all  other  commodities,  and  as 
they  are  the  price  of  all  other  commodities,  so  all  other  commodities 
are  the  price  of  those  metals.  We  trust  with  perfect  security  that 
the  freedom  of  trade,  without  any  attention  of  government,  will 
always  supply  us  with  the  wine  which  we  have  occasion  for :  and 
we  may  trust  with  equal  security  that  it  will  always  supply  us  with 
all  the  gold  and  silver  which  we  can  afford  to  purchase  or  to  em- 
ploy, either  in  circulating  our  commodities,  or  in  other  uses. 

The  quantity  of  every  commodity  which  human  industry  can 
either  purchase  or  produce  naturally  regulates  itself  in  every  coun- 
try according  to  the  effectual  demand,  or  according  to  the  demand 
of  those  who  are  willing  to  pay  the  whole  rent,  labour,  and  profits 
which  must  be  paid  in  order  to  prepare  and  bring  it  to  market. 
But  no  commodities  regulate  themselves  more  easily  or  more  exactly 
according  to  this  effectual  demand  than  gold  and  silver ;  because, 
on  account  of  the  small  bulk  and  great  value  of  those  metals,  no 
commodities  can  be  more  easily  transported  from  one  place  to 
another,  from  the  places  where  they  are  cheap  to  those  where  they 
are  dear,  from  the  places  where  they  exceed  to  those  where  they 
fall  short  of  this  effectual  demand.  If  there  were  in  England,  for 
example,  an  effectual  demand  for  an  additional  quantity  of  gold, 
a  packet-boat  could  bring  from  Lisbon,  or  from  wherever  else  it 
was  to  be  had,  fifty  tons  of  gold,  which  could  be  coined  into  more 
than  five  millions  of  guineas.  But  if  there  were  an  effectual  demand 
for  grain  to  the  same  value,  to  import  it  would  require,  at  five 
guineas  a  ton,  a  million  of  tons  of  shipping,  or  a  thousand  ships  of 
a  thousand  tons  each.    The  navy  of  England  would  not  be  sufficient. 


22  8  SMITH 

When  the  quantity  of  gold  and  silver  imported  into  any  country 
exceeds  the  effectual  demand,  no  vigilance  of  government  can  pre- 
vent their  exportation.  All  the  sanguinary  laws  of  Spain  and  Portu- 
gal are  not  able  to  keep  their  gold  and  silver  at  home.  The  continual 
importations  from  Peru  and  Brazil  exceed  the  effectual  demand  of 
those  countries,  and  sink  the  price  of  those  metals  there  below  that 
in  the  neighbouring  countries.  If,  on  the  contrary,  in  any  particular 
country  their  quantity  fell  short  of  the  effectual  demand,  so  as  to 
raise  their  price  above  that  of  the  neighbouring  countries,  the  gov- 
ernment would  have  no  occasion  to  take  any  pains  to  import  them. 
If  it  were  even  to  take  pains  to  prevent  their  importation,  it  would 
not  be  able  to  effectuate  it.  Those  metals,  when  the  Spartans  had 
got  wherewithal  to  purchase  them,  broke  through  all  the  barriers 
which  the  laws  of  Lycurgus  opposed  to  their  entrance  into  Lace- 
demon.  All  the  sanguinary  laws  of  the  customs  are  not  able  to 
prevent  the  importation  of  the  teas  of  the  Dutch  and  Gottenburgh 
East  India  companies,  because  somewhat  cheaper  than  those  of  the 
British  company.  A  pound  of  tea,  however,  is  about  a  hundred 
times  the  bulk  of  one  of  the  highest  prices,  sixteen  shillings,  that  is 
commonly  paid  for  it  in  silver,  and  more  than  two  thousand  times 
the  bulk  of  the  same  price  in  gold,  and  consequently  just  so  many 
times  more  difficult  to  smuggle. 

It  is  partly  owing  to  the  easy  transportation  of  gold  and  silver 
from  the  places  where  they  abound  to  those  where  they  are  wanted 
that  the  price  of  those  metals  does  not  fluctuate  continually  like 
that  of  the  greater  part  of  other  commodities,  which  are  hindered  by 
their  bulk  from  shifting  their  situation  when  the  market  happens 
to  be  either  over  or  under-stocked  with  them.  The  price  of  those 
metals,  indeed,  is  not  altogether  exempted  from  variation,  but  the 
changes  to  which  it  is  liable  are  generally  slow,  gradual,  and  uniform. 
In  Europe,  for  example,  it  is  supposed,  without  much  foundation, 
perhaps,  that  during  the  course  of  the  present  and  preceding  cen- 
tury they  have  been  constantly,  but  gradually,  sinking  in  their 
value,  on  account  of  the  continual  importations  from  the  Spanish 
West  Indies.  But  to  make  any  sudden  change  in  the  price  of  gold 
and  silver,  so  as  to  raise  or  lower  at  once,  sensibly  and  remarkably, 
the  money  price  of  all  other  commodities,  requires  such  a  revolution 
in  commerce  as  that  occasioned  by  the  discovery  of  America. 


COMMERCIAL- OR  MERCANTILE  SYSTEM  229 

If,  notwithstanding  all  this,  gold  and  silver  should  at  any  time 
fall  short  in  a  country  which  has  wherewithal  to  purchase  them, 
there  are  more  expedients  for  supplying  their  place  than  that  of 
almost  any  other  commodity.  If  the  materials  of  manufacture  are 
wanted,  industry  must  stop.  If  provisions  are  wanted,  the  people 
must  starve.  But  if  money  is  wanted,  barter  will  supply  its  place, 
though  with  a  good  deal  of  inconveniency.  Buying  and  selling 
upon  credit,  and  the  different  dealers  compensating  their  credits 
with  one  another,  once  a  month  or  once  a  year,  will  supply  it  with 
less  inconveniency.  A  well-regulated  paper  money  will  supply  it, 
not  only  without  any  inconvenience,  but,  in  some  cases,  with 
some  advantages.  Upon  every  account,  therefore,  the  attention  of 
government  never  was  so  unnecessarily  employed  as  when  directed 
to  watch  over  the  preservation  or  increase  of  the  quantity  of  money 
in  any  country. 

No  complaint,  however,  is  more  common  than  that  of  a  scarcity 
of  money.  Money,  like  wine,  must  always  be  scarce  with  those 
who  have  neither  wherewithal  to  buy  it  nor  credit  to  borrow  it. 
Those  who  have  either  will  seldom  be  in  want  either  of  the  money 
or  of  the  wine  which  they  have  occasion  for.  This  complaint,  how- 
ever, of  the  scarcity  of  money  is  not  always  confined  to  improvident 
spendthrifts.  It  is  sometimes  general  through  a  whole  mercantile 
town  and  the  country  in  its  neighbourhood.  Over-trading  is  the 
common  cause  of  it.  Sober  men,  whose  projects  have  been  dispro- 
portioned  to  their  capitals,  are  as  likely  to  have  neither  wherewithal 
to  buy  money  nor  credit  to  borrow  it,  as  prodigals  whose  expense 
has  been  disproportioned  to  their  revenue.  Before  their  projects 
can  be  brought  to  bear,  their  stock  is  gone,  and  their  credit  with  it. 
They  run  about  everywhere  to  borrow  money,  and  everybody  tells 
them  that  they  have  none  to  lend.  Even  such  general  complaints 
of  the  scarcity  of  money  do  not  always  prove  that  the  usual  number 
of  gold  and  silver  pieces  are  not  circulating  in  the  country,  but  that 
many  people  want  those  pieces  who  have  nothing  to  give  for  them. 
When  the  profits  of  trade  happen  to  be  greater  than  ordinary,  over- 
trading becomes  a  general  error  both  among  great  and  small  dealers. 
They  do  not  always  send  more  money  abroad  than  usual,  but  they 
buy  upon  credit,  both  at  home  and  abroad,  an  unusual  quantity  of 
goods,  which  they  send  to  some  distant  market  in  hopes  that  the 


2.30 


SMITH 


returns  will  come  in  before  the  demand  for  payment.  The  demand 
comes  before  the  returns,  and  they  have  nothing  at  hand  with  which 
they  can  either  purchase  money,  or  give  solid  security  for  borrow- 
ing. It  is  not  any  scarcity  of  gold  and  silver,  but  the  difficulty 
which  such  people  find  in  borrowing,  and  which  their  creditors 
find  in  getting  payment,  that  occasions  the  general  complaint  of 
the  scarcity  of  money. 

It  would  be  too  ridiculous  to  go  about  seriously  to  prove  that 
wealth  does  not  consist  in  money,  or  in  gold  and  silver ;  but  in  what 
money  purchases,  and  is  valuable  only  for  purchasing.  ]\Ioney,  no 
doubt,  makes  always  a  part  of  the  national  capital ;  but  it  has 
already  been  shown  that  it  generally  makes  but  a  small  part,  and 
always  the  most  unprofitable  part  of  it. 

It  is  not  because  wealth  consists  more  essentially  in  money  than 
in  goods  that  the  merchant  finds  it  generally  more  easy  to  buy  goods 
with  money  than  to  buy  money  with  goods ;  but  because  money  is 
the  known  and  established  instrument  of  commerce,  for  which  every- 
thing is  readily  given  in  exchange,  but  which  is  not  always  with 
equal  readiness  to  be  got  in  exchange  for  everything.  The  greater 
part  of  goods,  besides,  are  more  perishable  than  money,  and  he  may 
frequently  sustain  a  much  greater  loss  by  keeping  them.  When  his 
goods  are  upon  hand,  too,  he  is  more  liable  to  such  demands  for 
money  as  he  may  not  be  able  to  answer  than  when  he  has  got  their 
price  in  his  coffers.  Over  and  above  all  this,  his  profit  arises  more 
directly  from  selling  than  from  buying,  and  he  is  upon  all  these 
accounts  generally  much  more  anxious  to  exchange  his  goods  for 
money  than  his  money  for  goods.  But  though  a  particular  merchant, 
with  abundance  of  goods  in  his  warehouse,  may  sometimes  be  ruined 
by  not  being  able  to  sell  them  in  time,  a  nation  or  country  is  not 
liable  to  the  same  accident.  The  whole  capital  of  a  merchant  fre- 
quently consists  in  perishable  goods  destined  for  purchasing  money. 
But  it  is  but  a  very  small  part  of  the  annual  produce  of  the  land 
and  labour  of  a  country  which  can  ever  be  destined  for  purchasing 
gold  and  silver  from  their  neighbours.  The  far  greater  part  is 
circulated  and  consumed  among  themselves ;  and  even  of  the  surplus 
which  is  sent  abroad,  the  greater  part  is  generally  destined  for  the 
purchase  of  other  foreign  goods.  Though  gold  and  silver,  therefore, 
could  not  be  had  in  exchange  for  the  goods  destined  to  purchase 


COMMERCIAL  OR  MERCANTILE  SYSTEM  231 

them,  the  nation  would  not  be  ruined.  It  might,  indeed,  suffer  some 
loss  and  inconveniency,  and  be  forced  upon  some  of  those  expedients 
which  are  necessary  for  supplying  the  place  of  money.  The  annual 
produce  of  its  land  and  labour,  however,  would  be  the  same,  or  very 
nearly  the  same,  as  usual,  because  the  same,  or  very  nearly  the  same, 
consumable  capital  would  be  employed  in  maintaining  it.  And 
though  goods  do  not  always  draw  money  so  readily  as  money  draws 
goods,  in  the  long  run  they  draw  it  more  necessarily  than  even  it 
draws  them.  Goods  can  serve  many  other  purposes  besides  purchas- 
ing money,  but  money  can  serve  no  other  purpose  besides  purchasing 
goods.  INIoney,  therefore,  necessarily  runs  after  goods,  but  goods 
do  not  always  or  necessarily  run  after  money.  The  man  who  buys 
does  not  always  mean  to  sell  again,  but  frequently  to  use  or  to  con- 
sume ;  whereas  he  who  sells  always  means  to  buy  again.  The  one 
may  frequently  have  done  the  whole,  but  the  other  can  never  have 
done  more  than  the  one-half  of  his  business.  It  is  not  for  its  own 
sake  that  men  desire  money,  but  for  the  sake  of  what  they  can 
pm-chase  with  it. 

^Consumable  commodities,  it  is  said,  are  soon  destroyed  ;  whereas 
gold  and  silver  are  of  a  more  durable  nature,  and,  were  it  not  for 
this  continual  exportation,  might  be  accumulated  for  ages  together, 
to  the  incredible  augmentation  of  the  real  wealth  of  the  country. 
Nothing,  therefore,  it  is  pretended,  can  be  more  disadvantageous  to 
any  country  than  the  trade  which  consists  in  the  exchange  of  such 
lasting  for  such  perishable  commodities.  We  do  not,  however, 
reckon  that  trade  disadvantageous  which  consists  in  the  exchange  of 
the  hardware  of  England  for  the  wines  of  France  ;  and  yet  hard- 
ware is  a  very  durable  commodity,  and  were  it  not  for  this  continual 
exportation  might,  too,  be  accumulated  for  ages  together,  to  the 
incredible  augmentation  of  the  pots  and  pans  of  the  country.  But 
it  readily  occurs  that  the  number  of  such  utensils  is  in  every  country 
necessarily  limited  by  the  use  which  there  is  for  them  ;  that  it  would 
be  absurd  to  have  more  pots  and  pans  than  were  necessary  for 
cooking  the  victuals  usually  consumed  there  ;  and  that  if  the  quan- 
tity of  victuals  were  to  increase,  the  number  of  pots  and  pans  would 
readily  increase  along  with  it,  a  part  of  the  increased  quantity  of 
victuals  being  employed  in  purchasing  them,  or  in  maintaining  an 
additional  number  of  workmen  whose  business  it  v/as  to  make  them. 


232 


SMITH 


It  should  as  readily  occur  that  the  quantity  of  gold  and  silver  is  in 
every  country  limited  by  the  use  which  there  is  for  those  metals; 
that  their  use  consists  in  circulating  commodities  as  coin,  and  in 
affording  a  species  of  household  furniture  as  plate;  that  the  quan- 
tity of  coin  in  every  country  is  regulated  by  the  value  of  the  com- 
modities which  are  to  be  circulated  by  it :  increase  that  value,  and 
immediately  a  part  of  it  will  be  sent  abroad  to  purchase,  wherever 
it  is  to  be  had,  the  additional  quantify  of  coin  requisite  for  circulat- 
ing them :  that  the  quantity  of  plate  is  regulated  by  the  number  and 
wealth  of  those  private  families  who  choose  to  indulge  themselves 
in  that  sort  of  magnificence :   increase  the  number  and  wealth  of 
such  families,  and  a  part  of  this  increased  wealth  will  most  prob- 
ably be  employed  in  purchasing,  wherever  it  is  to  be  found,  an 
additional  quantity  of  plate :  that  to  attempt  to  increase  the  wealth 
of  any  country,  either  by  introducing  or  by  detaining  in  it  an  un- 
necessary quantity  of  gold  and  silver,  is  as  absurd  as  it  would  be 
to  attempt  to  increase  the  good  cheer  of  private  families  by  oblig- 
ing them  to  keep  an  unnecessary  number  of  kitchen  utensils.    As  the 
expense  of  purchasing  those  unnecessary  utensils  would  diminish 
instead  of  increasing  either  the  quantity  or  goodness  of  the  family 
provisions,  so  the  expense  of  purchasing  an  unnecessary  quantity 
of  gold  and  silver  must,  in  every  country,  as  necessarily  diminish 
the  wealth  which  feeds,  clothes,  and  lodges,  which  maintains  and 
employs  the  people.    Gold  and  silver,  whether  in  the  shape  of  coin 
or  of  plate,  are  utensils,  it  must  be  remembered,  as  much  as  the 
furniture  of  the  kitchen.    Increase  the  use  for  them,  increase  the 
consumable  commodities  which  are  to  be  circulated,  managed,  and 
prepared  by  means  of  them,  and  you  will  infallibly  increase  the 
quantity ;  but  if  you  attempt,  by  extraordinary  means,  to  increase 
the  quantity,  you  will  as  infallibly  diminish  the  use  and  even  the 
quantity  too,  which  in  those  metals  can  never  be  greater  than  what 
the  use  requires.    Were  they  ever  to  be  accumulated  beyond  this 
quantity,  their  transportation  is  so  easy,  and  the  loss  which  attends 
their  lying  idle  and  unemployed  so  great,  that  no  law  could  prevent 
their  being  immediately  sent  out  of  the  country. 

It  is  not  always  necessary  to  accumulate  gold  and  silver  in  order 
to  enable  a  country  to  carry  on  foreign  wars,  and  to  maintain  fleets 
and  armies  in  distant  countries.    Fleets  and  armies  are  maintained, 


COMMERCIAL  OR  MERCANTILE  SYSTEM  233 

not  with  gold  and  silver,  but  with  consumable  goods.  The  nation 
which,  from  the  annual  produce  of  its  domestic  industry,  from  the 
annual  revenue  arising  out  of  its  lands,  labour,  and  consumable 
stock,  has  wherewithal  to  purchase  those  consumable  goods  in  dis- 
tant countries,  can  maintain  foreign  wars  there. 

A  nation  may  purchase  the  pay  and  provisions  of  an  army  in  a 
distant  country  three  different  ways :  by  sending  abroad  either,  first, 
some  part  of  its  accumulated  gold  and  silver;  or,  secondly,  some 
part  of  the  annual  produce  of  its  manufactures ;  or,  last  of  all, 
some  part  of  its  annual  rude  produce. 

The  gold  and  silver  which  can  properly  be  considered  as  accumu- 
lated or  stored  up  in  any  country  may  be  distinguished  into  three 
parts :  first,  the  circulating  money ;  secondly,  the  plate  of  private 
families ;  and,  last  of  all,  the  money  which  may  have  been  collected 
by  many  years  parsimony,  and  laid  up  in  the  treasury  of  the 
prince. 

It  can  seldom  happen  that  much  can  be  spared  from  the  circulat- 
ing money  of  the  country ;  because  in  that  there  can  seldom  be  much 
redundancy.  The  value  of  goods  annually  bought  and  sold  in  any 
country  requires  a  certain  quantity  of  money  to  circulate  and  dis- 
tribute them  to  their  proper  consumers,  and  can  give  employment 
to  no  more.  The  channel  of  circulation  necessarily  draws  to  itself 
a  sum  sufficient  to  fill  it,  and  never  admits  any  more.  Something, 
however,  is  generally  withdrawn  from  this  channel  in  the  case  of 
foreign  war.  By  the  great  number  of  people  who  are  maintained 
abroad,  fewer  are  maintained  at  home.  Fewer  goods  are  circulated 
there,  and  less  money  becomes  necessary  to  circulate  them.  An 
extraordinary  quantity  of  paper  money,  of  some  sort  or  other,  such 
as  exchequer  notes,  navy  bills,  and  bank  bills  in  England,  is  gener- 
ally issued  upon  such  occasions,  and  by  supplying  the  place  of  cir- 
culating gold  and  silver,  gives  an  opportunity  of  sending  a  greater 
quantity  of  it  abroad.  All  this,  however,  could  afford  but  a  poor 
resource  for  maintaining  a  foreign  war  of  great  expense  and  several 
years  duration. 

The  melting  down  the  plate  of  private  families  has  upon  every 
occasion  been  found  a  still  more  insignificant  one.  The  French,  in 
the  beginning  of  the  last  war,  did  not  derive  so  much  advantage 
from  this  expedient  as  to  compensate  the  loss  of  the  fashion. 


2  34  SMITH 

The  accumulated  treasures  of  the  prince  have,  in  former  times, 
afforded  a  much  greater  and  more  lasting  resource.  In  the  present 
times,  if  you  except  the  king  of  Prussia,  to  accumulate  treasure 
seems  to  be  no  part  of  the  policy  of  European  princes. 

The  funds  which  maintained  the  foreign  wars  of  the  present  cen- 
tury, the  most  expensive  perhaps  which  history  records,  seem  to 
have  had  little  dependency  upon  the  exportation  either  of  the  cir- 
culating money,  or  of  the  plate  of  private  families,  or  of  the  treasure 
of  the  prince.    The  last  French  war  cost  Great  Britain  upwards 
of  ninety  millions,  including  not  only  the  seventy-five  millions  of 
new  debt  that  was  contracted,  but  the  additional  two  shillings  in  the 
pound  land-tax,  and  what  was  annually  borrowed  of  the  sinking 
fund.    More  than  two-thirds  of  this  expense  were  laid  out  in  distant 
countries ;  in  Germany,  Portugal,  America,  in  the  ports  of  the  INIedi- 
terranean,  in  the  East  and  West  Indies.    The  kings  of  England  had 
no   accumulated   treasure.    We  never  heard   of  any  extraordinary 
quantity  of  plate  being  melted  down.    The  circulating  gold  and  silver 
of  the  country  had  not  been  supposed  to  exceed  eighteen  millions. 
Since  the  late  recoinage  of  the  gold,  however,  it  is  believed  to  have 
been  a  good  deal  under-rated.    Let  us  suppose,  therefore,  according 
to  the  most  exaggerated  computation  which  I  remember  to  have 
either  seen  or  heard  of,  that,  gold  and  silver  together,  it  amounted  to 
thirty  millions.    Had  the  war  been  carried  on  by  means  of  our  money, 
the  whole  of  it  must,  even  according  to  this  computation,  have  been 
sent  out  and  returned  again  at  least  twice  in  a  period  of  between  six 
and  seven  years.    Should  this  be  supposed,  it  would  afford  the  most 
decisive  argument  to  demonstrate  how  unnecessary  it  is  for  govern- 
ment  to  watch  over   the  preservation   of   money,   since  upon   this 
supposition  the  whole  money  of  the  country  must  have  gone  from  it 
and  returned  to  it  again,  two  different  times  in  so  short  a  period, 
without  anybody's  knowing  anything  of  the  matter.    The  channel 
of  circulation,   however,  never  appeared   more   empty   than   usual 
during  any  part  of  this  period.    Few  people  wanted  money  who  had 
wherewithal   to  pay  for  it.    The  profits  of  foreign  trade,  indeed, 
were  greater  than  usual  during  the  whole  war ;  but  especially  towards 
the  end  of  it.    This  occasioned,  what  it  always  occasions,  a  general 
over-trading  in  all  the  parts  of  Great  Britain ;  and  this  again  occa- 
sioned the  usual  complaint  of  the  scarcity  of  money,  which  always 


COMMERCIAL  OR  MERCANTILE  SYSTEM  235 

follows  over-trading.  Many  people  wanted  it,  who  had  neither 
wherewithal  to  buy  it,  nor  credit  to  borrow  it ;  and  because  the 
debtors  found  it  difficult  to  borrow,  the  creditors  found  it  difficult 
to  get  payment.  Gold  and  silver,  however,  were  generally  to  be  had 
for  their  value,  by  those  who  had  that  value  to  give  for  them. 

The  enormous  expense  of  the  late  war,  therefore,  must  have  been 
chiefly  defrayed,  not  by  the  exportation  of  gold  and  silver,  but  by 
that  of  British  commodities  of  some  kind  or  other.    When  the  gov- 
ernment, or  those  who  acted  under  them,  contracted  with  a  mer- 
chant for  a  remittance  to  some  foreign  country,  he  would  naturally 
endeavour  to  pay  his  foreign   correspondent,   upon  whom  he  had 
granted  a  bill,  by  sending  abroad   rather  commodities   than   gold 
and  silver.    If  the  commodities  of  Great  Britain  were  not  in  demand 
in  that  country,  he  would  endeavour  to  send  them  to  some  other 
country,  in  which  he  could  purchase  a  bill  upon  that  country.    The 
transportation  of  commodities,  when  properly  suited  to  the  market, 
is  always  attended  with  a  considerable  profit ;  whereas  that  of  gold 
and  silver  is  scarce  ever  attended  with  any.    When  those  metals 
are  sent  abroad  in  order  to  purchase  foreign  commodities,  the  mer- 
chant's profit  arises,  not  from  the  purchase,  but  from  the  sale  of 
the  returns.    But  when  they  are  sent  abroad  merely  to  pay  a  debt, 
he  gets  no  returns,  and  consequently  no  profit.    He  naturally,  there- 
fore, exerts  his  invention  to  find  out  a  way  of  paying  his  foreign 
debts  rather  by  the  exportation  of  commodities  than  by  that  of 
gold   and   silver.    The    great    quantity    of    British    goods    exported 
during  the  course  of  the  late  war,  without  bringing  back  any  returns, 
is  accordingly  remarked  by  the  author  of   The  Present  State  oj 
the  Nation. 

Besides  the  three  sorts  of  gold  and  silver  above  mentioned, 
there  is  in  all  great  commercial  countries  a  good  deal  of  bullion  alter- 
nately imported  and  exported  for  the  purposes  of  foreign  trade. 
This  bullion,  as  it  circulates  among  different  commercial  countries 
in  the  same  manner  as  the  national  coin  circulates  in  every  par- 
ticular country,  may  be  considered  as  the  money  of  the  great  mer- 
cantile republic.  The  national  coin  receives  its  movement  and 
direction  from  the  commodities  circulated  within  the  precincts  of 
each  particular  country :  the  money  of  the  mercantile  republic,  from 
those  circulated  between  different  countries.    Both  are  employed  in 


236  SMITH 

facilitating  exchanges,  the  one  between  different  individuals  of  the 
same,  the  other  between  those  of  different  nations.  Part  of  this  money 
of  the  great  mercantile  republic  may  have  been,  and  probably  was, 
employed  in  carrying  on  the  late  war.  In  time  of  a  general  war, 
it  is  natural  to  suppose  that  a  movement  and  direction  should  be 
impressed  upon  it,  different  from  what  it  usually  follows  in  profound 
peace ;  that  it  should  circulate  more  about  the  seat  of  the  war,  and 
be  more  employed  in  purchasing  there,  and  in  the  neighbouring 
countries,  the  pay  and  provisions  of  the  different  armies.  But  what- 
ever part  of  this  money  of  the  mercantile  republic  Great  Britain  may 
have  annually  employed  in  this  manner,  it  must  have  been  annually 
purchased,  either  with  British  commodities,  or  with  something  else 
that  had  been  purchased  with  them ;  which  still  brings  us  back  to 
commodities,  to  the  annual  produce  of  the  land  and  labour  of  the 
country,  as  the  ultimate  resources  which  enabled  us  to  carry  on  the 
war.  It  is  natural  indeed  to  suppose  that  so  great  an  annual  expense 
must  have  been  defrayed  from  a  great  annual  produce.  The  expense 
of  1 761,  for  example,  amounted  to  more  than  nineteen  millions. 
No  accumulation  could  have  supported  so  great  an  annual  profusion. 
There  is  no  annual  produce  even  of  gold  and  silver  which  could 
have  supported  it.  The  whole  gold  and  silver  annually  imported 
into  both  Spain  and  Portugal,  according  to  the  best  accounts,  does 
not  commonly  much  exceed  six  millions  sterling,  which,  in  some 
years,  would  scarce  have  paid  four  months'  expense  of  the  late  war. 
The  commodities  most  proper  for  being  transported  to  distant 
countries,  in  order  to  purchase  there  either  the  pay  and  provisions 
of  an  army,  or  some  part  of  the  money  of  the  mercantile  republic  to 
be  employed  in  purchasing  them,  seem  to  be  the  finer  and  more 
improved  manufactures  ;  such  as  contain  a  great  value  in  a  small 
bulk,  and  can,  therefore,  be  exported  to  a  great  distance  at  little 
expense.  A  country  whose  industry  produces  a  great  annual  sur- 
plus of  such  manufactures,  which  are  usually  exported  to  foreign 
countries,  may  carry  on  for  many  years  a  very  expensive  foreign 
war  without  either  exporting  any  considerable  quantity  of  gold  and 
silver,  or  even  having  any  such  quantity  to  export.  A  considerable 
part  of  the  annual  surplus  of  its  manufactures  must,  indeed,  in  this 
case  be  exported  without  bringing  back  any  returns  to  the  country, 
though  it  does  to  the  merchant ;  the  government  purchasing  of  the 


COMMERCIAL  OR  MERCANTILE  SYSTEM  237 

merchant  his  bills  upon  foreign  countries,  in  order  to  purchase  there 
the  pay  and  provisions  of  an  army.  Some  part  of  this  surplus,  how- 
ever, may  still  continue  to  bring  back  a  return.  The  manufacturers, 
during  the  war,  will  have  a  double  demand  upon  them,  and  be  called 
upon,  first,  to  work  up  goods  to  be  sent  abroad,  for  paying  the  bills 
drawn  upon  foreign  countries  for  the  pay  and  provisions  of  the 
army ;  and,  secondly,  to  work  up  such  as  are  necessary  for  purchas- 
ing the  common  returns  that  had  usually  been  consumed  in  the 
country.  In  the  midst  of  the  most  destructive  foreign  war,  there- 
fore, the  greater  part  of  manufactures  may  frequently  flourish 
greatly ;  and,  on  the  contrary,  they  may  decline  on  the  return  of  the 
peace.  They  may  flourish  amidst  the  ruin  of  their  country,  and 
begin  to  decay  upon  the  return  of  its  prosperity.  The  different 
state  of  many  different  branches  of  the  British  manufactures  during 
the  late  war,  and  for  some  time  after  the  peace,  may  serve  as  an 
illustration  of  what  has  been  just  now  said. 

No  foreign  war  of  great  expense  or  duration  could  conveniently 
be  carried  on  by  the  exportation  of  the  rude  produce  of  the  soil. 
The  expense  of  sending  such  a  quantity  of  it  to  a  foreign  country 
as  might  purchase  the  pay  and  provisions  of  an  army  would  be 
too  great.  Few  countries  produce  much  more  rude  produce  than 
what  is  sufficient  for  the  subsistence  of  their  own  inhabitants.  To 
send  abroad  any  great  quantity  of  it,  therefore,  would  be  to  send 
abroad  a  part  of  the  necessary  subsistence  of  the  people.  It  is  other- 
wise with  the  exportation  of  manufactures.  The  maintenance  of 
the  people  employed  in  them  is  kept  at  home,  and  only  the  surplus 
part  of  their  work  is  exported.  Mr.  Hume  frequently  takes  notice 
of  the  inability  of  the  ancient  kings  of  England  to  carry  on,  with- 
out interruption,  any  foreign  war  of  long  duration.  The  English, 
in  those  days,  had  nothing  wherewithal  to  purchase  the  pay  and 
provisions  of  their  armies  in  foreign  countries,  but  either  the  rude 
produce  of  the  soil,  of  which  no  considerable  part  could  be  spared 
from  the  home  consumption,  or  a  few  manufactures  of  the  coarsest 
kind,  of  which,  as  well  as  of  the  rude  produce,  the  transportation 
was  too  expensive.  This  inability  did  not  arise  from  the  want  of 
money,  but  of  the  finer  and  more  improved  manufactures.  Buying 
and  selling  was  transacted  by  means  of  money  in  England  then  as 
well  as  now.    The  quantity  of  circulating  money  must  have  borne 


238  SMITH 

ths  same  proportion  to  the  number  and  value  of  purchases  and  sales 
usually  transacted  at  that  time,  which  it  does  to  those  transacted  at 
present ;  or  rather  it  must  have  borne  a  greater  proportion,  because 
there  was  then  no  paper,  which  now  occupies  a  great  part  of  the  em- 
ployment of  gold  and  silver.  Among  nations  to  whom  commerce 
and  manufactures  are  little  known,  the  sovereign,  upon  extraordinary 
occasions,  can  seldom  draw  any  considerable  aid  from  his  subjects, 
for  reasons  which  shall  be  explained  hereafter.  It  is  in  such  coun- 
tries, therefore,  that  he  generally  endeavours  to  accumulate  a  treas- 
ure, as  the  only  resource  against  such  emergencies.  Independent  of 
this  necessity,  he  is  in  such  a  situation  naturally  disposed  to  the 
parsimony  requisite  for  accumulation.  In  that  simple  state,  the 
expense  even  of  a  sovereign  is  not  directed  by  the  vanity  which 
delights  in  the  gaudy  finery  of  a  court,  but  is  employed  in  bounty 
to  his  tenants,  and  hospitality  to  his  retainers.  But  bounty  and  hos- 
pitality very  seldom  lead  to  extravagance ;  though  vanity  almost 
always  does.  Every  Tartar  chief,  accordingly,  has  a  treasure.  The 
treasures  of  Mazepa,  chief  of  the  Cossacks  in  the  Ukraine,  the  famous 
ally  of  Charles  the  XII.,  are  said  to  have  been  very  great.  The  French 
kings  of  the  Merovingian  race  had  all  treasures.  When  they  divided 
their  kingdom  among  their  different  children,  they  divided  their 
treasure  too.  The  Saxon  princes,  and  the  first  kings  after  the  con- 
quest, seem  likewise  to  have  accumulated  treasures.  The  first  ex- 
ploit of  every  new  reign  was  commonly  to  seize  the  treasure  of  the 
preceding  king,  as  the  most  essential  measure  for  securing  the  suc- 
cession. The  sovereigns  of  improved  and  commercial  countries  are 
not  under  the  same  necessity  of  accumulating  treasures,  because  they 
can  generally  draw  from  their  subjects  extraordinary  aids  upon 
extraordinary  occasions.  They  are  likewise  less  disposed  to  do  so. 
They  naturally,  perhaps  necessarily,  follow  the  mode  of  the  times, 
and  their  expense  comes  to  be  regulated  by  the  same  extravagant  van- 
ity which  directs  that  of  all  the  other  great  proprietors  in  their  domin- 
ions. The  insignificant  pageantry  of  their  court  becomes  every  day 
more  brilliant,  and  the  expense  of  it  not  only  prevents  accumulation, 
but  frequently  encroaches  upon  the  funds  destined  for  more  necessary 
expenses.  What  Dercyllidas  said  of  the  court  of  Persia  may  be  ap- 
plied to  that  of  several  European  princes,  that  he  saw  there  much 
splendour  but  little  strength,  and  many  servants  but  few  soldiers.  ■ 


COMMERCIAL  OR  MERCANTILE  SYSTEM  239 

The  importation  of  gold  and  silver  is  not  the  principal,  much  less 
the  sole  benefit  which  a  nation  derives  from  its  foreign  trade.  Be- 
tween whatever  places  foreign  trade  is  carried  on,  they  all  of  them 
derive  two  distinct  benefits  from  it.  It  carries  out  that  surplus  part 
of  the  produce  of  their  land  and  labour  for  which  there  is  no  demand 
among  them,  and  brings  back  in  return  for  it  something  else  for 
which  there  is  a  demand.  It  gives  a  value  to  their  superfluities,  by 
exchanging  them  for  something  else,  which  may  satisfy  a  part  of 
their  wants,  and  increase  their  enjoyments.  By  means  of  it  the  nar- 
rowness of  the  home  market  does  not  hinder  the  division  of  labour 
in  any  particular  branch  of  art  or  manufacture  from  being  carried 
to  the  highest  perfection.  By  opening  a  more  extensive  market  for 
whatever  part  of  the  produce  of  their  labour  may  exceed  the  home 
consumption,  it  encourages  them  to  improve  its  productive  powers, 
and  to  augment  its  annual  produce  to  the  utmost,  and  thereby  to 
increase  the  real  revenue  and  wealth  of  the  society.  These  great  and 
important  services  foreign  trade  is  continually  occupied  in  perform- 
ing to  all  the  different  countries  between  which  it  is  carried  on. 
They  all  derive  great  benefit  from  it,  though  that  in  which  the 
merchant  resides  generally  derives  the  greatest,  as  he  is  generally 
more  employed  in  supplying  the  wants,  and  carrying  out  the  super- 
fluities of  his  own,  than  of  any  other  particular  country.  To  import 
the  gold  and  silver  which  may  be  wanted  into  the  countries  which 
have  no  mines  is,  no  doubt,  a  part  of  the  business  of  foreign  com- 
merce. It  is,  however,  a  most  insignificant  part  of  it.  A  country 
which  carried  on  foreign  trade  merely  upon  this  account  could  scarce 
have  occasion  to  freight  a  ship  in  a  century. 

It  is  not  by  the  importation  of  gold  and  silver  that  the  discovery 
of  America  has  enriched  Europe.  By  the  abundance  of  the  American 
mines,  those  metals  have  become  cheaper.  A  service  of  plate  can 
now  be  purchased  for  about  a  third  part  of  the  corn,  or  a  third  part 
of  the  labour,  which  it  would  have  cost  in  the  fifteenth  century. 
With  the  same  annual  expense  of  labour  and  commodities,  Europe 
can  annually  purchase  about  three  times  the  quantity  of  plate  which 
it  could  have  purchased  at  that  time.  But  when  a  commodity  comes 
to  be  sold  for  a  third  part  oi  what  had  been  its  usual  price,  not  only 
those  who  purchased  it  before  can  purchase  three  times  their  former 
quantity,  but  it  is  brought  down  to  the  level  of  a  much  greater 


2  40  SMITH 

number  of  purchasers,  perhaps  to  more  than  ten,  perhaps  to  more 
than  twenty  times  the  former  number.  So  that  there  may  be  in 
Europe  at  present  not  only  more  than  three  times,  but  more  than 
twenty  or  thirty  times  the  quantity  of  plate  which  would  have  been 
in  it,  even  in  its  present  state  of  improvement,  had  the  discovery  of 
the  American  mines  never  been  made.  So  far  Europe  has,  no  doubt, 
gained  a  real  conveniency,  though  surely  a  very  trifling  one.  The 
cheapness  of  gold  and  silver  renders  those  metals  rather  less  fit  for 
the  purposes  of  money  than  they  were  before.  In  order  to  make 
the  same  purchases,  we  must  load  ourselves  with  a  greater  quantity 
of  them,  and  carry  about  a  shilling  in  our  pocket  where  a  groat 
would  have  done  before.  It  is  difficult  to  say  which  is  most  trifling, 
this  inconveniency  or  the  opposite  conveniency.  Neither  the  one 
nor  the  other  could  have  made  any  very  essential  change  in  the  state 
of  Europe.  The  discovery  of  America,  however,  certainly  made  a 
most  essential  one.  By  opening  a  new  and  inexhaustible  market 
to  all  the  commodities  of  Europe,  it  gave  occasion  to  new  divisions 
of  labour  and  improvements  of  art,  which,  in  the  narrow  circle  of 
the  ancient  commerce,  could  never  have  taken  place  for  want  of  a 
market  to  take  off  the  greater  part  of  their  produce.  The  productive 
powers  of  labour  were  improved,  and  its  produce  increased  in  all  the 
different  countries  of  Europe,  and  together  with  it  the  real  revenue 
and  wealth  of  the  inhabitants.  The  commodities  of  Europe  were 
almost  all  new  to  America,  and  many  of  those  of  America  were  new 
to  Europe.  A  new  set  of  exchanges,  therefore,  began  to  take  place 
which  had  never  been  thought  of  before,  and  which  should  naturally 
have  proved  as  advantageous  to  the  new,  as  it  certainly  did  to  the  old 
continent.  The  savage  injustice  of  the  Europeans  rendered  an  event, 
which  ought  to  have  been  beneficial  to  all,  ruinous  and  destructive 
to  several  of  those  unfortunate  countries. 

The  discovery  of  a  passage  to  the  East  Indies  by  the  Cape  of 
Good  Hope,  which  happened  much  about  the  same  time,  opened 
perhaps  a  still  more  extensive  range  to  foreign  commerce  than  even 
that  of  America,  notwithstanding  the  greater  distance.  There  were 
but  two  nations  in  America  in  any  respect  superior  to  savages,  and 
these  were  destroyed  almost  as  soon  as 'discovered.  The  rest  were 
mere  savages.  But  the  empires  of  China,  Indostan,  Japan,  as  well 
as  several  others  in  the  East  Indies,  without  having  richer  mines  of 


COMMERCIAL  OR  MERCANTILE  SYSTEM  241 

gold  or  silver,  were  in  every  other  respect  much  richer,  better  culti- 
vated, and  more  advanced  in  all  arts  and  manufactures  than  either 
Mexico  or  Peru,  even  though  we  should  credit,  what  plainly  deserves 
no  credit,  the  exaggerated  accounts  of  the  Spanish  writers  concern- 
ing the  ancient  state  of  those  empires.  But  rich  and  civilised  nations 
can  always  exchange  to  a  much  greater  value  with  one  another  than 
with  savages  and  barbarians.  Europe,  however,  has  hitherto  derived 
much  less  advantage  from  its  commerce  with  the  East  Indies  than 
from  that  with  America.  The  Portuguese  monopolised  the  East 
India  trade  to  themselves  for  about  a  century,  and  it  was  only 
indirectly  and  through  them  that  the  other  nations  of  Europe  could 
either  send  out  or  receive  any  goods  from  that  country.  When  the 
Dutch,  in  the  beginning  of  the  last  century,  began  to  encroach  upon 
them,  they  vested  their  whole  East  India  commerce  in  an  exclusive 
company.  The  English,  French,  Swedes,  and  Danes  have  all  fol- 
lowed their  example,  so  that  no  great  nation  in  Europe  has  ever  yet 
had  the  benefit  of  a  free  commerce  to  the  East  Indies.  No  other 
reason  need  be  assigned  why  it  has  never  been  so  advantageous  as 
the  trade  to  America,  which,  between  almost  every  nation  of  Europe 
and  its  own  colonies,  is  free  to  all  its  subjects.  The  exclusive  privi- 
leges of  those  East  India  companies,  their  great  riches,  the  great 
favour  and  protection  which  these  have  procured  them  from  their 
respective  governments,  have  excited  much  envy  against  them.  This 
envy  has  frequently  represented  their  trade  as  altogether  pernicious, 
on  account  of  the  great  quantities  of  silver  which  it  every  year  ex- 
ports from  the  countries  from  which  it  is  carried  on.  The  parties 
concerned  have  replied  that  their  trade,  by  this  continual  exportation 
of  silver,  might  indeed  tend  to  impoverish  Europe  in  general,  but 
not  the  particular  country  from  which  it  was  carried  on ;  because, 
by  the  exportation  of  a  part  of  the  returns  to  other  European  coun- 
tries, it  annually  brought  home  a  much  greater  quantity  of  that 
metal  than  it  carried  out.  Both  the  objection  and  the  reply  are 
founded  in  the  popular  notion  which  I  have  been  just  now  examin- 
ing. It  is  therefore  unnecessary  to  say  anything  further  about  either. 
By  the  annual  exportation  of  silver  to  the  East  Indies,  plate  is 
probably  somewhat  dearer  in  Europe  than  it  otherwise  might  have 
been ;  and  coined  silver  probably  purchases  a  larger  quantity  both 
of  labour  and  commodities.    The  former  of  these  two  effects  is  a 


242  SMITH 

very  small  loss,  the  latter  a  very  small  advantage ;  both  too  insig- 
nificant to  deserve  any  part  of  the  public  attention.  The  trade  to 
the  East  Indies,  by  opening  a  market  to  the  commodities  of  Europe, 
or,  what  comes  nearly  to  the  same  thing,  to  the  gold  and  silver  which 
is  purchased  with  those  commodities,  must  necessarily  tend  to  in- 
crease the  annual  production  of  European  commodities,  and  conse- 
quently the  real  wealth  and  revenue  of  Europe.  That  it  has  hitherto 
increased  them  so  little  is  probably  owing  to  the  restraints  which  it 
everywhere  labours  under. 

I  thought  it  necessary,  though  at  the  hazard  of  being  tedious,  to 
examine  at  full  length  this  popular  notion  that  wealth  consists  in 
money,  or  in  gold  and  silver.  Money  in  common  language,  as  I 
have  already  observed,  frequently  signifies  wealth,  and  this  am- 
biguity of  expression  has  rendered  this  popular  notion  so  familiar  to 
us  that  even  they  who  are  convinced  of  its  absurdity  are  very  apt 
to  forget  their  own  principles,  and  in  the  course  of  their  reasonings  to 
take  it  for  granted  as  a  certain  and  undeniable  truth.  Some  of  the 
best  English  writers  upon  commerce  set  out  with  observing  that  the 
wealth  of  a  country  consists,  not  in  its  gold  and  silver  only,  but  in 
its  lands,  houses,  and  consumable  goods  of  all  different  kinds.  In 
the  course  of  their  reasonings,  however,  the  lands,  houses,  and  con- 
sumable goods  seem  to  slip  out  of  their  memory,  and  the  strain  of 
their  argument  frequently  supposes  that  all  wealth  consists  in  gold 
and  silver,  and  that  to  multiply  those  metals  is  the  great  object  of 
national  industry  and  commerce. 

The  two  principles  being  established,  however,  that  wealth  con- 
sisted in  gold  and  silver,  and  that  those  metals  could  be  brought 
into  a  country  which  had  no  mines  only  by  the  balance  of  trade,  or  by 
exporting  to  a  greater  value  than  it  imported,  it  necessarily  became 
the  great  object  of  political  economy  to  diminish  as  much  as  possible 
the  importation  of  foreign  goods  for  home  consumption,  and  to  in- 
crease as  much  as  possible  the  exportation  of  the  produce  of  domestic 
industry.  Its  two  great  engines  for  enriching  the  country,  therefore, 
were  restraints  upon  importation,  and  encouragements  to  exportation. 

The  restraints  upon  importation  were  of  two  kinds. 

First,  restraints  upon  the  importation  of  such  foreign  goods  for 
home  consumption  as  could  be  produced  at  home,  from  whatever 
country  they  were  imported. 


COMMERCIAL  OR  MERCANTILE  SYSTEM  243 

Secondly,  restraints  upon  the  importation  of  goods  of  almost  all 
kinds  from  those  particular  countries  with  which  the  balance  of 
trade  was  supposed  to  be  disadvantageous. 

Those  different  restraints  consisted  sometimes  in  high  duties,  and 
sometimes  in  absolute  prohibitions. 

Exportation  was  encouraged  sometimes  by  drawbacks,  sometimes 
by  bounties,  sometimes  by  advantageous  treaties  of  commerce  with 
foreign  states,  and  sometimes  by  the  establishment  of  colonies  in 
distant  countries. 

Drawbacks  were  given  upon  two  different  occasions.  When  the 
home  manufactures  were  subject  to  any  duty  or  excise,  either  the 
whole  or  a  part  of  it  was  frequently  drawn  back  upon  their  exporta- 
tion ;  and  when  foreign  goods  liable  to  a  duty  were  imported  in  order 
to  be  exported  again,  either  the  whole  or  a  part  of  this  duty  was 
sometimes  given  back  upon  such  exportation. 

Bounties  were  given  for  the  encouragement  either  of  some  begin- 
ning manufactures,  or  of  such  sorts  of  industry  of  other  kinds  as 
were  supposed  to  deserve  particular  favour. 

By  advantageous  treaties  of  commerce,  particular  privileges  were 
procured  in  some  foreign  state  for  the  goods  and  merchants  of  the 
country,  beyond  what  were  granted  to  those  of  other  countries. 

By  the  establishment  of  colonies  in  distant  countries,  not  only 
particular  privileges,  but  a  monopoly  was  frequently  procured  for 
the  goods  and  merchants  of  the  country  which  established  them. 

The  two  sorts  of  restraints  upon  importation  above-mentioned, 
together  with  these  four  encouragements  to  exportation,  constitute 
the  six  principal  means  by  which  the  commercial  system  proposes  to 
increase  the  quantity  of  gold  and  silver  in  any  country  by  turning 
the  balance  of  trade  in  its  favour.  I  shall  consider  each  of  them  in 
a  particular  chapter,  and  without  taking  much  further  notice  of  their 
supposed  tendency  to  bring  money  into  the  country,  I  shall  examine 
chiefly  what  are  likely  to  be  the  effects  of  each  of  them  upon  the 
annual  produce  of  its  industry.  According  as  they  tend  either  to 
increase  or  diminish  the  value  of  this  annual  produce,  they  must 
evidently  tend  either  to  increase  or  diminish  the  real  wealth  and 
revenue  of  the  country. 


244  SMITH 

SMITH :  OF  RESTRAINTS  UPON  THE  IMPORTATION 

FROM  FOREIGN  COUNTRIES  OF  SUCH   GOODS  AS 

CAN  BE  PRODUCED  AT  HOME^ 

By  restraining,  either  by  high  duties  or  by  absolute  prohibitions, 
the  importation  of  such  goods  from  foreign  countries  as  can  be  pro- 
duced at  home,  the  monopoly  of  the  home  market  is  more  or  less 
secured  to  the  domestic  industry  employed  in  producing  them.  Thus 
the  prohibition  of  importing  either  live  cattle  or  salt  provisions  from 
foreign  countries  secures  to  the  graziers  of  Great  Britain  the  mo- 
nopoly of  the  home  market  for  butcher's  meat.  The  high  duties 
upon  the  importation  of  corn,  which  in  times  of  moderate  plenty 
amount  to  a  prohibition,  give  a  like  advantage  to  the  growers  of 
that  com,modity.  The  prohibition  of  the  importation  of  foreign 
woollens  is  equally  favourable  to  the  woollen  manufacturers.  The 
silk  manufacture,  though  altogether  employed  upon  foreign  ma- 
terials, has  lately  obtained  the  same  advantage.  The  linen  manu- 
facture has  not  yet  obtained  it,  but  is  making  great  strides  towards 
it.  Many  other  sorts  of  manufacturers  have,  in  the  same  manner, 
obtained  in  Great  Britain,  either  altogether  or  very  nearly,  a  mo- 
nopoly against  their  countrymen.  The  variety  of  goods  of  which  the 
importation  into  Great  Britain  is  prohibited,  either  absolutely,  or 
under  certain  circumstances,  greatly  exceeds  what  can  easily  be 
suspected  by  those  who  are  not  well  acquainted  with  the  laws  of 
the  customs. 

That  this  monopoly  of  the  home  market  frequently  gives  great 
encouragement  to  that  particular  species  of  industry  which  enjoys 
it,  and  frequently  turns  towards  that  employment  a  greater  share  of 
both  the  labour  and  stock  of  the  society  than  would  otherwise  have 
gone  to  it,  cannot  be  doubted.  But  whether  it  tends  either  to 
increase  the  general  industry  of  the  society,  or  to  give  it  the  most 
advantageous  direction,  is  not,  perhaps,  altogether  so  evident. 

The  general  industry  of  the  society  never  can  exceed  what  the 
capital  of  the  society  can  employ.  As  the  number  of  workmen 
that  can  be  kept  in  employment  by  any  particular  person  must  bear 

1  Smith,  Wealth  of  Nations,  Bk.  IV,  chap.  ii. 


OF  RESTRAINTS  UPON  IMPORTATION  245 

a  certain  proportion  to  his  capital,  so  the  number  of  those  that  can 
be  continually  employed  by  all  the  members  of  a  great  society  must 
bear  a  certain  proportion  to  the  whole  capital  of  that  society,  and 
never  can  exceed  that  proportion.  No  regulation  of  commerce  can 
increase  the  quantity  of  industry  in  any  society  beyond  what  its 
capital  can  maintain.  It  can  only  divert  a  part  of  it  into  a  direction 
into  which  it  might  not  otherwise  have  gone ;  and  it  is  by  no  means 
certain  that  this  artificial  direction  is  likely  to  be  more  advantageous 
to  the  society  than  that  into  which  it  would  have  gone  of  its 
own  accord. 

Every  individual  is  continually  exerting  himself  to  find  out  the 
most  advantageous  employment  for  whatever  capital  he  can  com- 
mand. It  is  his  own  advantage,  indeed,  and  not  that  of  the  society, 
which  he  has  in  view.  But  the  study  of  his  own  advantage  natu- 
rally, or  rather  necessarily,  leads  him  to  prefer  that  employment 
which  is  most  advantageous  to  the  society. 

First,  every  individual  endeavours  to  employ  his  capital  as  near 
home  as  he  can,  and  consequently  as  much  as  he  can  in  the  support 
of  domestic  industry ;  provided  always  that  he  can  thereby  obtain 
the  ordinary,  or  not  a  great  deal  less  than  the  ordinary  profits 
of  stock. 

Thus,  upon  equal  or  nearly  equal  profits,  every  wholesale  mer- 
chant naturally  prefers  the  home  trade  to  the  foreign  trade  of 
consumption,  and  the  foreign  trade  of  consumption  to  the  carry- 
ing trade.  In  the  home  trade  his  capital  is  never  so  long  out 
of  his  sight  as  it  frequently  is  in  the  foreign  trade  of  consump- 
tion. He  can  know  better  the  character  and  situation  of  the  per- 
sons whom  he  trusts,  and  if  he  should  happen  to  be  deceived,  he 
knows  better  the  laws  of  the  country  from  which  he  must  seek 
redress.  In  the  carrying  trade,  the  capital  of  the  merchant  is,  as 
it  were,  divided  between  two  foreign  countries,  and  no  part  of  it 
is  ever  necessarily  brought  home,  or  placed  under  his  own  im- 
mediate view  and  command.  The  capital  which  an  Amsterdam 
merchant  employs  in  carrying  corn  from  Konnigsberg  to  Lisbon, 
and  fruit  and  wine  from  Lisbon  to  Konnigsberg,  must  generally  be 
the  one-half  of  it  at  Konnigsberg  and  the  other  half  at  Lisbon.  No 
part  of  it  need  ever  come  to  Amsterdam.  The  natural  residence  of 
such  a  merchant  should  either  be  at  Konnigsberg  or  Lisbon,  and  it 


246  SMITH 

can  only  be  some  very  particular  circumstances  which  can  make  him 
prefer  the  residence  of  Amsterdam.  The  uneasiness,  however,  which 
he  feels  at  being  separated  so  far  from  his  capital  generally  determines 
him  to  bring  part  both  of  the  Konnigsberg  goods  which  he  destines 
for  the  market  of  Lisbon,  and  of  the  Lisbon  goods  which  he  destines 
for  that  of  Konnigsberg,  to  Amsterdam  :  and  though  this  necessarily 
subjects  him  to  a  double  charge  of  loading  and  unloading,  as  well  as 
to  the  payment  of  some  duties  and  customs,  yet  for  the  sake  of  hav- 
ing some  part  of  his  capital  always  under  his  own  view  and  com- 
mand, he  willingly  submits  to  this  extraordinary  charge ;  and  it  is 
in  this  manner  that  every  country  which  has  any  considerable  share 
of  the  carrying  trade  becomes  always  the  emporium,  or  general 
market,  for  the  goods  of  all  the  different  countries  whose  trade  it 
carries  on.  The  merchant,  in  order  to  save  a  second  loading  and 
unloading,  endeavours  always  to  sell  in  the  home  market  as  much  of 
the  goods  of  all  those  different  countries  as  he  can,  and  thus,  so  far 
as  he  can,  to  convert  his  carrying  trade  into  a  foreign  trade  of 
consumption.  A  merchant,  in  the  same  manner,  who  is  engaged  in 
the  foreign  trade  of  consumption,  when  he  collects  goods  for  foreign 
markets,  will  always  be  glad,  upon  equal  or  nearly  equal  profits,  to 
sell  as  great  a  part  of  them  at  home  as  he  can.  He  saves  himself  the 
risk  and  trouble  of  exportation,  when,  so  far  as  he  can,  he  thus 
converts  his  foreign  trade  of  consumption  into  a  home  trade.  Home 
is  in  this  manner  the  centre,  if  I  may  say  so,  round  which  the  capitals 
of  the  inhabitants  of  every  country  are  continually  circulating,  and 
towards  which  they  are  always  tending,  though  by  particular  causes 
they  may  sometimes  be  driven  off  and  repelled  from  it  towards  more 
distant  employments.  But  a  capital  employed  in  the  home  trade,  it 
has  already  been  shown,^  necessarily  puts  into  motion  a  greater 
quantity  of  domestic  industry,  and  gives  revenue  and  employment 
to  a  greater  number  of  the  inhabitants  of  the  country,  than  an  equal 
capital  employed  in  the  foreign  trade  of  consumption :  and  one 
employed  in  the  foreign  trade  of  consumption  has  the  same  advan- 
tage over  an  equal  capital  employed  in  the  carrying  trade.  Upon 
equal,  or  only  nearly  equal  profits,  therefore,  every  individual  natu- 
rally inclines  to  employ  his  capital  in  the  manner  in  which  it  is 

iln  Book  II,  chapter  v,  "Of  the  Different  Employment  of  Capitals."  (Ed.) 


OF  RESTRAINTS  UPON  IMPORTATION  247 

likely  to  afford  the  greatest  support  to  domestic  industry,  and  to 
give  revenue  and  employment  to  the  greatest  number  of  people  of 
his  own  country. 

Secondly,  every  individual  who  employs  his  capital  in  the  support 
of  domestic  industry,  necessarily  endeavours  so  to  direct  that  indus- 
try that  its  produce  may  be  of  the  greatest  possible  value. 

The  produce  of  industry  is  what  it  adds  to  the  subject  or  mate- 
rials upon  which  it  is  employed.  In  proportion  as  the  value  of  this 
produce  is  great  or  small,  so  will  likewise  be  the  profits  of  the 
employer.  But  it  is  only  for  the  sake  of  profit  that  any  man  employs 
a  capital  in  the  support  of  industry ;  and  he  will  always,  therefore, 
endeavour  to  employ  it  in  the  support  of  that  industry  of  which  the 
produce  is  great  or  small,  so  will  likewise  be  the  profits  of  the 
greatest  quantity  either  of  money  or  of  other  goods. 

But  the  annual  revenue  of  every  society  is  always  precisely  equal 
to  the  exchangeable  value  of  the  whole  annual  produce  of  its  indus- 
try, or  rather  is  precisely  the  same  thing  with  that  exchangeable 
value.  As  every  individual,  therefore,  endeavours  as  much  as  he 
can  both  to  employ  his  capital  in  the  support  of  domestic  industry, 
and  so  to  direct  that  industry  that  its  produce  may  be  of  the  great- 
est value ;  every  individual  necessarily  labours  to  render  the  annual 
revenue  of  the  society  as  great  as  he  can.  He  generally,  indeed, 
neither  intends  to  promote  the  public  interest,  nor  knows  how  much 
he  is  promoting  it.  By  preferring  the  support  of  domestic  to  that 
of  foreign  industry,  he  intends  only  his  own  security  ;  and  by  direct- 
ing that  industry  in  such  a  manner  as  its  produce  may  be  of  the 
greatest  value,  he  intends  only  his  own  gain,  and  he  is  in  this,  as  in 
many  other  cases,  led  by  an  invisible  hand  to  promote  an  end  which 
was  no  part  of  his  intention.  Nor  is  it  always  the  worse  for  the 
society  that  it  was  no  part  of  it.  By  pursuing  his  own  interest  he 
frequently  promotes  that  of  the  society  more  effectually  than  when 
he  really  intends  to  promote  it.  I  have  never  known  much  good 
done  by  those  who  affected  to  trade  for  the  public  good.  It  is  an 
affectation,  indeed,  not  very  common  among  merchants,  and  very 
few  words  need  be  employed  in  dissuading  them  from  it. 

What  is  the  species  of  domestic  industry  which  his  capital  can 
employ,  and  of  which  the  produce  is  likely  to  be  of  the  greatest  value, 


248  SMITH 

every  individual,  it  is  evident,  can,  in  his  local  situation,  judge  much 
better  than  any  statesman  or  lawgiver  can  do  for  him.  The  states- 
man who  should  attempt  to  direct  private  people  in  what  manner 
they  ought  to  employ  their  capitals  would  not  only  load  himself 
with  a  most  unnecessary  attention,  but  assume  an  authority  which 
could  safely  be  trusted,  not  only  to  no  single  person,  but  to  no  coun- 
cil or  senate  whatever,  and  which  would  nowhere  be  so  dangerous 
as  in  the  hands  of  a  man  who  had  folly  and  presumption  enough  to 
fancy  himself  fit  to  exercise  it. 

To  give  the  monopoly  of  the  home  market  to  the  produce  of  do- 
mestic industry,  in  any  particular  art  or  manufacture,  is  in  some 
measure  to  direct  private  people  in  what  manner  they  ought  to 
employ  their  capitals,  and  must,  in  almost  all  cases,  be  either  a  use- 
less or  a  hurtful  regulation.  If  the  produce  of  domestic  can  be 
brought  there  as  cheap  as  that  of  foreign  industry,  the  regulation  is 
evidently  useless.  If  it  cannot,  it  must  generally  be  hurtful.  It  is 
the  maxim  of  every  prudent  master  of  a  family  never  to  attempt  to 
make  at  home  what  it  will  cost  him  more  to  make  than  to  buy.  The 
tailor  does  not  attempt  to  make  his  own  shoes,  but  buys  them  of 
the  shoemaker.  The  shoemaker  does  not  attempt  to  make  his  own 
clothes,  but  employs  a  tailor.  The  farmer  attempts  to  make  neither 
the  one  nor  the  other,  but  employs  those  different  artificers.  All 
of  them  find  it  for  their  interest  to  employ  their  whole  industry  in  a 
way  in  which  they  have  some  advantage  over  their  neighbours, 
and  to  purchase  with  a  part  of  its  produce,  of  what  is  the  same 
thing,  with  the  price  of  a  part  of  it,  whatever  else  they  have  occa- 
sion  for. 

What  is  prudence  in  the  conduct  of  every  private  family  can 
scarce  be  folly  in  that  of  a  great  kingdom.  If  a  foreign  country  can 
supply  us  with  a  commodity  cheaper  than  we  ourselves  can  make  it, 
better  buy  it  of  them  with  some  part  of  the  produce  of  our  own 
industry  employed  in  a  way  in  which  we  have  some  advantage. 
The  general  industry  of  the  country,  being  always  in  proportion  to 
the  capital  which  employs  it,  will  not  thereby  be  diminished,  no 
more  than  that  of  the  above-mentioned  artificers ;  but  only  left  to 
find  out  the  way  in  which  it  can  be  employed  with  the  greatest 
advantage.  It  is  certainly  not  employed  to  the  greatest  advantage 
when  it  is  thus  directed  towards  an  object  which  it  can  buy  cheaper 


OF  RESTRAINTS  UPON  IMPORTATION  249 

than  it  can  make.  The  value  of  its  annual  produce  is  certainly  more 
or  less  diminished  when  it  is  thus  turned  away  from  producing  com- 
modities evidently  of  more  value  than  the  commodity  which  it  is 
directed  to  produce.  According  to  the  supposition,  that  commodity 
could  be  purchased  from  foreign  countries  cheaper  than  it  can  be 
made  at  home.  It  could,  therefore,  have  been  purchased  with  a  part 
only  of  the  commodities,  or,  what  is  the  same  thing,  with  a  part 
only  of  the  price  of  the  commodities,  which  the  industry  employed 
by  an  equal  capital  would  have  produced  at  home,  had  it  been  left 
to  follow  its  natural  course.  The  industry  of  the  country,  therefore,  is 
thus  turned  away  from  a  more  to  a  less  advantageous  employment, 
and  the  exchangeable  value  of  its  annual  produce,  instead  of  being  in- 
creased, according  to  the  intention  of  the  lawgiver,  must  necessarily 
be  diminished  by  every  such  regulation. 

By  means  of  such  regulations,  indeed,  a  particular  manufacture 
may  sometimes  be  acquired  sooner  than  it  could  have  been  other- 
wise, and  after  a  certain  time  may  be  made  at  home  as  cheap  or 
cheaper  than  in  the  foreign  country.  But  though  the  industry  of  the 
society  may  be  thus  carried  with  advantage  into  a  particular  channel 
sooner  than  it  could  have  been  otherwise,  it  will  by  no  means  follow 
that  the  sum  total,  either  of  its  industry,  or  of  its  revenue,  can  ever 
be  augmented  by  any  such  regulation.  The  industry  of  the  society 
can  augment  only  in  proportion  as  its  capital  augments,  and  its 
capital  can  augment  only  in  proportion  to  what  can  be  gradually 
saved  out  of  its  revenue.  But  the  immediate  effect  of  every  such 
regulation  is  to  diminish  its  revenue,  and  what  diminishes  its  revenue 
is  certainly  not  very  likely  to  augment  its  capital  faster  than  it 
would  have  augmented  of  its  own  accord  had  both  capital  and 
industry  been  left  to  find  out  their  natural  employments. 

Though  for  want  of  such  regulations  the  society  should  never 
acquire  the  proposed  manufacture,  it  would  not,  upon  that  account, 
necessarily  be  the  poorer  in  any  one  period  of  its  duration.  In  every 
period  of  its  duration  its  whole  capital  and  industry  might  still  have 
been  employed,  though  upon  different  objects,  in  the  manner  that 
was  most  advantageous  at  the  time.  In  every  period  its  revenue 
might  have  been  the  greatest  which  its  capital  could  afford,  and 
both  capital  and  revenue  might  have  been  augmented  with  the 
greatest  possible  rapidity. 


2  SO  SMITH 

The  natural  advantages  which  one  country  has  over  another  in 
producing  particular  commodities  are  sometimes  so  great  that  it  is 
acknowledged  by  all  the  world  to  be  in  vain  to  struggle  with  them. 
By  means  of  glasses,  hotbeds,  and  hot  walls,  very  good  grapes  can 
be  raised  in  Scotland,  and  very  good  wine  too  can  be  made  of  them 
at  about  thirty  times  the  expense  for  which  at  least  equally  good 
can  be  brought  from  foreign  countries.  Would  it  be  a  reasonable 
law  to  prohibit  the  importation  of  all  foreign  wines  merely  to  en- 
courage the  making  of  claret  and  burgundy  in  Scotland?  But  if 
there  would  be  a  manifest  absurdity  in  turning  towards  any  employ- 
ment thirty  times  more  of  the  capital  and  industry  of  the  country 
than  would  be  necessary  to  purchase  from  foreign  countries  an  equal 
quantity  of  the  commodities  wanted,  there  must  be  an  absurdity, 
though  not  altogether  so  glaring,  yet  exactly  of  the  same  kind,  in 
turning  towards  any  such  employment  a  thirtieth,  or  even  a  three- 
hundredth  part  more  of  either.  Whether  the  advantages  which  one 
country  has  over  another  be  natural  or  acquired  is  in  this  respect 
of  no  consequence.  As  long  as  the  one  country  has  those  advantages, 
and  the  other  wants  them,  it  will  always  be  more  advantageous  for 
the  latter  rather  to  buy  of  the  former  than  to  make.  It  is  an  acquired 
advantage  only,  which  one  artificer  has  over  his  neighbour,  who 
exercises  another  trade ;  and  yet  they  both  find  it  more  advan- 
tageous to  buy  of  one  another  than  to  make  what  does  not  belong  to 
their  particular  trades. 

Merchants  and  manufacturers  are  the  people  who  derive  the 
greatest  advantage  from  this  monopoly  of  the  home  market.  The 
prohibition  of  the  importation  of  foreign  cattle,  and  of  salt  provi- 
sions, together  with  the  high  duties  upon  foreign  corn,  which  in 
times  of  moderate  plenty  amount  to  a  prohibition,  are  not  near  so 
advantageous  to  the  graziers  and  farmers  of  Great  Britain  as  other 
regulations  of  the  same  kind  are  to  its  merchants  and  manufacturers. 
Manufactures,  those  of  the  finer  kind  especially,  are  more  easily 
transported  from  one  country  to  another  than  corn  or  cattle.  It  is 
in  the  fetching  and  carrying  manufactures,  accordingly,  that  foreign 
trade  is  chiefly  employed.  In  manufactures,  a  very  small  advantage 
will  enable  foreigners  to  undersell  our  own  workmen,  even  in  the 
home  market.  It  will  require  a  very  great  one  to  enable  them  to 
do  so  in  the  rude  produce  of  the  soil.    If  the  free  importation  of 


OF  RESTRAINTS  UPON  IMPORTATION  251 

foreign  manufactures  were  permitted,  several  of  the  home  manu- 
factures would  probably  suffer,  and  some  of  them,  perhaps,  go  to 
ruin  altogether,  and  a  considerable  part  of  the  stock  and  industry  at 
present  employed  in  them  would  be  forced  to  find  out  some  other 
employment.  But  the  freest  importation  of  the  rude  produce  of 
the  soil  could  have  no  such  effect  upon  the  agriculture  of  the  country. 

If  the  importation  of  foreign  cattle,  for  example,  were  made  ever 
so  free,  so  few  could  be  imported  that  the  grazing  trade  of  Great 
Britain  could  be  little  affected  by  it.  Live  cattle  are,  perhaps,  the 
only  commodity  of  which  the  transportation  is  more  expensive  by 
sea  than  by  land.  By  land  they  carry  themselves  to  market.  By 
sea,  not  only  the  cattle,  but  their  food  and  their  water  too,  must 
be  carried  at  no  small  expense  and  inconveniency.  The  short  sea 
between  Ireland  and  Great  Britain,  indeed,  renders  the  importa- 
tion of  Irish  cattle  more  easy.  But  though  the  free  importation  of 
them,  which  was  lately  permitted  only  for  a  limited  time,  were 
rendered  perpetual,  it  could  have  no  considerable  effect  upon  the 
interest  of  the  graziers  of  Great  Britain.  Those  parts  of  Great 
Britain  which  border  upon  the  Irish  Sea  are  all  grazing  countries. 
Irish  cattle  could  never  be  imported  for  their  use,  but  must  be 
driven  through  those  very  extensive  countries,  at  no  small  expense 
and  inconveniency,  before  they  could  arrive  at  their  proper  market. 
Fat  cattle  could  not  be  driven  so  far.  Lean  cattle,  therefore,  only 
could  be  imported,  and  such  importation  could  interfere,  not  with  the 
interest  of  the  feeding  or  fattening  countries,  to  which,  by  reducing 
the  price  of  lean  cattle,  it  would  rather  be  advantageous,  but  with 
that  of  the  breeding  countries  only.  The  small  number  of  Irish 
cattle  imported  since  their  importation  was  permitted,  together  with 
the  good  price  at  which  lean  cattle  still  continue  to  sell,  seem  to 
demonstrate  that  even  the  breeding  countries  of  Great  Britain  are 
never  likely  to  be  much  affected  by  the  free  importation  of  Irish 
cattle.  The  common  people  of  Ireland,  indeed,  are  said  to  have 
sometimes  opposed  with  violence  the  exportation  of  their  cattle. 
But  if  the  exporters  had  found  any  great  advantage  in  continuing 
the  trade,  they  could  easily,  when  the  law  was  on  their  side,  have 
conquered  this  mobbish  opposition. 

Feeding  and  fattening  countries,  besides,  must  always  be  highly 
improved,   whereas  breeding   countries   are   generally   uncultivated. 


2  52  SMITH 

The  high  price  of  lean  cattle,  by  augmenting  the  value  of  unculti- 
vated land,  is  like  a  bounty  against  improvement.  To  any  country 
which  was  highly  improved  throughout,  it  would  be  more  advan- 
tageous to  import  its  lean  cattle  than  to  breed  them.  The  province 
of  Holland,  accordingly,  is  said  to  follow  this  maxim  at  present. 
The  mountains  of  Scotland,  Wales,  and  Northumberland,  indeed, 
are  countries  not  capable  of  much  improvement,  and  seem  destined 
by  nature  to  be  the  breeding  countries  of  Great  Britain.  The  freest 
importation  of  foreign  cattle  could  have  no  other  effect  than  to 
hinder  those  breeding  countries  from  taking  advantage  of  the  in- 
creasing population  and  improvement  of  the  rest  of  the  kingdom, 
from  raising  their  price  to  an  exorbitant  height,  and  from  laying  a 
real  tax  upon  all  the  more  improved  and  cultivated  parts  of  the 
country. 

The  freest  importation  of  salt  provisions,  in  the  same  manner, 
could  have  as  little  effect  upon  the  interest  of  the  graziers  of  Great 
Britain  as  that  of  live  cattle.  Salt  provisions  are  not  only  a  very 
bulky  commodity,  but  when  compared  with  fresh  meat,  they  are  a 
commodity  both  of  worse  quality,  and  as  they  cost  more  labour 
and  expense,  of  higher  price.  They  could  never,  therefore,  come 
into  competition  with  the  fresh  meat,  though  they  might  with  the 
salt  provisions  of  the  country.  They  might  be  used  for  victualling 
ships  for  distant  voyages  and  such  like  uses,  but  could  never  make 
any  considerable  part  of  the  food  of  the  people.  The  small  quantity 
of  salt  provisions  imported  from  Ireland  since  their  importation  was 
rendered  free  is  an  experimental  proof  that  our  graziers  have  nothing 
to  apprehend  from  it.  It  does  not  appear  that  the  price  of  butcher's 
meat  has  ever  been  sensibly  affected  by  it. 

Even  the  free  importation  of  foreign  corn  could  very  little  affect 
the  interest  of  the  farmers  of  Great  Britain.  Corn  is  a  much  more 
bulky  commodity  than  butcher's  meat.  A  pound  of  wheat  at  a 
penny  is  as  dear  as  a  pound  of  butcher's  meat  at  fourpence.  The 
small  quantity  of  foreign  corn  imported  even  in  times  of  the  great- 
est scarcity  may  satisfy  our  farmers  that  they  can  have  nothing  to 
fear  from  the  freest  importation.  The  average  quantity  imported, 
one  year  with  another,  amounts  only,  according  to  the  very  well 
informed  author  of  the  tracts  upon  the  corn  trade,  to  twenty-three 
thousand  seven  hundred  and  twenty-eight  quarters  of  all  sorts  of 


OF  RESTRAINTS  UPON  IMPORTATION  253 

grain,  and  does  not  exceed  the  five  hundred  and  seventy-first  part 
of  the  annual  consumption.  But  as  the  bounty  upon  corn  occasions 
a  greater  exportation  in  years  of  plenty,  so  it  must  of  consequence 
occasion  a  greater  importation  in  years  of  scarcity  than  in  the  actual 
state  of  tillage  would  otherwise  take  place.  By  means  of  it  the 
plenty  of  one  year  does  not  compensate  the  scarcity  of  another,  and 
as  the  average  quantity  exported  is  necessarily  augmented  by  it,  so 
must  likewise,  in  the  actual  state  of  tillage,  the  average  quantity 
imported.  If  there  were  no  bounty,  as  less  corn  would  be  exported, 
so  it  is  probable  that,  one  year  with  another,  less  would  be  imported 
than  at  present.  The  corn  merchants,  the  fetchers  and  carriers  of 
corn  between  Great  Britain  and  foreign  countries,  would  have  much 
less  employment,  and  might  suffer  considerably ;  but  the  country 
gentlemen  and  farmers  could  suffer  very  little.  It  is  in  the  corn 
merchants  accordingly,  rather  than  in  the  country  gentlemen  and 
farmers,  that  I  have  observed  the  greatest  anxiety  for  the  renewal 
and  continuation  of  the  bounty. 

Country  gentlemen  and  farmers  are,  to  their  great  honour,  of  all 
people,  the  least  subject  to  the  wretched  spirit  of  monopoly.  The 
undertaker  of  a  great  manufactory  is  sometimes  alarmed  if  another 
work  of  the  same  kind  is  established  within  twenty  miles  of  him. 
The  Dutch  undertaker  of  the  woollen  manufacture  at  Abbeville 
stipulated  that  no  work  of  the  same  kind  should  be  established  within 
thirty  leagues  of  that  city.  Farmers  and  country  gentlemen,  on 
the  contrary,  are  generally  disposed  rather  to  promote  than  to  ob- 
struct the  cultivation  and  improvement  of  their  neighbours'  farms 
and  estates.  They  have  no  secrets  such  as  those  of  the  greater  part 
of  manufacturers,  but  are  generally  rather  fond  of  communicating 
to  their  neighbours  and  of  extending  as  far  as  possible  any  new 
practice  which  they  have  found  to  be  advantageous.  Pius  Questus, 
says  old  Cato,  stabilissimusque,  minimeque  invidiosus ;  minimeqiie 
male  cogitantes  sunt,  qui  in  eo  studio  occupati  sunt.  Country  gentle- 
men and  farmers,  dispersed  in  different  parts  of  the  country,  cannot 
so  easily  combine  as  merchants  and  manufacturers,  who,  being  col- 
lected into  towns,  and  accustomed  to  that  exclusive  corporation 
spirit  which  prevails  in  them,  naturally  endeavour  to  obtain  against 
all  their  countrymen  the  same  exclusive  privilege  which  they  gen- 
erally  possess  against   the   inhabitants   of   their   respective   towns. 


2  54  SMITH 

They  accordingly  seem  to  have  been  the  original  inventors  of  those 
restraints  upon  the  importation  of  foreign  goods  which  secure  to 
them  the  monopoly  of  the  home  market.  It  was  probably  in  imita- 
tion of  them,  and  to  put  themselves  upon  a  level  with  those  who, 
they  found,  were  disposed  to  oppress  them,  that  the  country  gentle- 
men and  farmers  of  Great  Britain  so  far  forgot  the  generosity  which 
is  natural  to  their  station  as  to  demand  the  exclusive  privilege  of 
supplying  their  countrymen  with  corn  and  butcher's  meat.  They 
did  not  perhaps  take  time  to  consider  how  much  less  their  interest 
could  be  affected  by  the  freedom  of  trade  than  that  of  the  people 
whose  example  they  followed. 

To  prohibit  by  a  perpetual  law  the  importation  of  foreign  corn 
and  cattle  is  in  reality  to  enact  that  the  population  and  industry  of 
the  country  shall  at  no  time  exceed  what  the  rude  produce  of  its 
own  soil  can  maintain. 

There  seem,  however,  to  be  two  cases  in  which  it  will  generally 
be  advantageous  to  lay  some  burden  upon  foreign  for  the  encourage- 
ment of  domestic  industry. 

The  first  is,  when  some  particular  sort  of  industry  is  necessary 
for  the  defence  of  the  country.  The  defence  of  Great  Britain,  for 
example,  depends  very  much  upon  the  number  of  its  sailors  and 
shipping.  The  act  of  navigation,  therefore,  very  properly  endeavours 
to  give  the  sailors  and  shipping  of  Great  Britain  the  monopoly  of 
the  trade  of  their  own  country,  in  some  cases  by  absolute  prohibi- 
tions and  in  others  by  heavy  burdens  upon  the  shipping  of  foreign 
countries.    The  following  are  the  principal  dispositions  of  this  act. 

First,  all  ships,  of  which  the  owners  and  three-fourths  of  the 
mariners  are  not  British  subjects,  are  prohibited,  upon  pain  of 
forfeiting  ship  and  cargo,  from  trading  to  the  British  settlements 
and  plantations,  or  from  being  employed  in  the  coasting  trade  of 
Great  Britain. 

Secondly,  a  great  variety  of  the  most  bulky  articles  of  importa- 
tion can  be  brought  into  Great  Britain  only,  either  in  such  ships  as 
are  above  described,  or  in  ships  of  the  country  where  those  goods 
are  purchased,  and  of  which  the  owners,  masters,  and  three-fourths 
of  the  mariners  are  of  that  particular  country;  and  when  imported 
even  in  ships  of  this  latter  kind,  they  are  subject  to  double  aliens' 
duty.    If  imported  in  ships  of  any  other  country,  the  penalty  is 


OF  RESTRAINTS  UPON  IMPORTATION  255 

forfeiture  of  ship  and  goods.  When  this  act  was  made,  the  Dutch 
were,  what  they  still  are,  the  great  carriers  of  Europe,  and  by  this 
regulation  they  were  entirely  excluded  from  being  the  carriers  to 
Great  Britain,  or  from  importing  to  us  the  goods  of  any  other 
European   country. 

Thirdly,  a  great  variety  of  the  most  bulky  articles  of  importation 
are  prohibited  from  being  imported,  even  in  British  ships,  from  any 
country  but  that  in  which  they  are  produced,  under  pain  of  forfeit- 
ing ship  and  cargo.  This  regulation,  too,  was  probably  intended 
against  the  Dutch.  Holland  was  then,  as  now,  the  great  emporium 
for  all  European  goods,  and  by  this  regulation  British  ships  were 
hindered  from  loading  in  Holland  the  goods  of  any  other  European 
country. 

Fourthly,  salt  fish  of  all  kinds,  whale-fins,  whale-bone,  oil,  and 
blubber,  not  caught  by  and  cured  on  board  British  vessels,  when 
imported  into  Great  Britain,  are  subjected  to  double  aliens'  duty.  The 
Dutch,  as  they  are  still  the  principal,  were  then  the  only  fishers  in 
Europe  that  attempted  to  supply  foreign  nations  with  fish.  By  this 
regulation,  a  very  heavy  burden  was  laid  upon  their  supplying 
Great  Britain. 

When  the  act  of  navigation  was  made,  though  England  and  Hol- 
land were  not  actually  at  war,  the  most  violent  animosity  subsisted 
between  the  two  nations.  It  had  begun  during  the  government  of 
the  Long  Parliament,  which  first  framed  this  act,  and  it  broke  out 
soon  after  in  the  Dutch  wars  during  that  of  the  Protector  and  of 
Charles  the  Second.  It  is  not  impossible,  therefore,  that  some  of 
the  regulations  of  this  famous  act  may  have  proceeded  from  national 
animosity.  They  are  as  wise,  however,  as  if  they  had  all  been  dic- 
tated by  the  most  deliberate  wisdom.  National  animosity  at  that 
particular  time  aimed  at  the  very  same  object  which  the  most  deliber- 
ate wisdom  would  have  recommended,  the  diminution  of  the  naval 
power  of  Holland,  the  only  naval  power  which  could  endanger  the 
security  of  England. 

The  act  of  navigation  is  not  favourable  to  foreign  commerce,  or 
to  the  growth  of  that  opulence  which  can  arise  from  it.  The  interest 
of  a  nation  in  its  commercial  relations  to  foreign  nations  is,  like  that 
of  a  merchant  with  regard  to  the  different  people  with  whom  he 
deals,  to  buy  as  cheap  and  to  sell  as  dear  as  possible.    But  it  will  be 


2S6  SMITH 

most  likely  to  buy  cheap,  when  by  the  most  perfect  freedom  of  trade 
it  encourages  all  nations  to  bring  to  it  the  goods  which  it  has  occa- 
sion to  purchase ;  and,  for  the  same  reason,  it  will  be  most  likely 
to  sell  dear,  when  its  markets  are  thus  filled  with  the  greatest  number 
of  buyers.  The  act  of  navigation,  it  is  true,  lays  no  burden  upon 
foreign  ships  that  come  to  export  the  produce  of  British  industry. 
Even  the  ancient  aliens'  duty,  which  used  to  be  paid  upon  all  goods 
exported  as  well  as  imported,  has,  by  several  subsequent  acts,  been 
taken  off  from  the  greater  part  of  the  articles  of  exportation.  But 
if  foreigners,  either  by  prohibitions  or  high  duties,  are  hindered 
from  coming  to  sell,  they  cannot  always  afford  to  come  to  buy, 
because  coming  without  a  cargo,  they  must  lose  the  freight  from 
their  own  country  to  Great  Britain.  By  diminishing  the  number  of 
sellers,  therefore,  we  necessarily  diminish  that  of  buyers,  and  are 
thus  likely  not  only  to  buy  foreign  goods  dearer,  but  to  sell  our  own 
cheaper,  than  if  there  was  a  more  perfect  freedom  of  trade.  As 
defence,  however,  is  of  much  more  importance  than  opulence,  the 
act  of  navigation  is,  perhaps,  the  wisest  of  all  the  commercial  regu- 
lations of  England. 

The  second  case,  in  which  it  will  generally  be  advantageous  to 
lay  some  burden  upon  foreign  for  the  encouragement  of  domestic 
industry  is,  when  some  tax  is  imposed  at  home  upon  the  produce  of 
the  latter.  In  this  case,  it  seems  reasonable  that  an  equal  tax  should  be 
imposed  upon  the  like  produce  of  the  former.  This  would  not  give 
the  monopoly  of  the  home  market  to  domestic  industry,  nor  turn 
towards  a  particular  employment  a  greater  share  of  the  stock  and 
labour  of  the  country  than  what  would  naturally  go  to  it.  It  would 
only  hinder  any  part  of  what  would  naturally  go  to  it  from  being 
turned  away  by  the  tax  into  a  less  natural  direction,  and  would 
leave  the  competition  between  foreign  and  domestic  industry,  after 
the  tax,  as  nearly  as  possible  upon  the  same  footing  as  before  it.  In 
Great  Britain,  when  any  such  tax  is  laid  upon  the  produce  of  domes- 
tic industry,  it  is  usual  at  the  same  time,  in  order  to  stop  the 
clamorous  complaints  of  our  merchants  and  manufacturers  that 
they  will  be  undersold  at  home,  to  lay  a  much  heavier  duty  upon 
the  importation  of  all  foreign  goods  of  the  same  kind. 

This  second  limitation  of  the  freedom  of  trade  according  to  some 
people  shpuld;  upon  some  occasions,  be  extended  much  farther  than 


OF  RESTRAINTS  UPON  IMPORTATION  257 

to  the  precise  foreign  commodities  which  could  come  into  compe- 
tition with  those  which  had  been  taxed  at  home.  When  the  neces- 
saries of  Hfe  have  been  taxed  in  any  country,  it  becomes  proper, 
they  pretend,  to  tax  not  only  the  like  necessaries  of  life  imported 
from  other  countries,  but  all  sorts  of  foreign  goods  which  can  come 
into  competition  with  anything  that  is  the  produce  of  domestic  indus- 
try. Subsistence,  they  say,  becomes  necessarily  dearer  in  conse- 
quence of  such  taxes ;  and  the  price  of  labour  must  always  rise 
with  the  price  of  the  labourers'  subsistence.  Every  commodity, 
therefore,  which  is  the  produce  of  domestic  industry,  though  not 
immediately  taxed  itself,  becomes  dearer  in  consequence  of  such 
taxes,  because  the  labour  which  produces  it  becomes  so.  Such  taxes, 
therefore,  are  really  equivalent,  they  say,  to  a  tax  upon  every  par- 
ticular commodity  produced  at  home.  In  order  to  put  domestic 
upon  the  same  footing  with  foreign  industry,  therefore,  it  becomes 
necessary,  they  think,  to  lay  some  duty  upon  every  foreign  commod- 
ity equal  to  this  enhancement  of  the  price  of  the  home  commodities 
with  which  it  can  come  into  competition. 

Whether  taxes  upon  the  necessaries  of  life,  such  as  those  in  Great 
Britain  upon  soap,  salt,  leather,  candles,  etc.,  necessarily  raise  the 
price  of  labour,  and  consequently  that  of  all  other  commodities,  I 
shall  consider  hereafter  when  I  come  to  treat  "of  taxes.  Supposing, 
however,  in  the  meantime,  that  they  have  this  effect,  and  they  have 
it  undoubtedly,  this  general  enhancement  of  the  price  of  all  com- 
modities, in  consequence  of  that  of  labour,  is  a  case  which  differs  in 
the  two  following  respects  from  that  of  a  particular  commodity  of 
which  the  price  was  enhanced  by  a  particular  tax  immediately 
imposed  upon  it. 

First,  it  might  always  be  known  with  great  exactness  how  far  the 
price  of  such  a  commodity  could  be  enhanced  by  such  a  tax :  but 
how  far  the  general  enhancement  of  the  price  of  labour  might  affect 
that  of  every  different  commodity  about  which  labour  was  employed 
could  never  be  known  with  any  tolerable  exactness.  It  would  be 
impossible,  therefore,  to  proportion  with  any  tolerable  exactness  the 
tax  upon  every  foreign  to  this  enhancement  of  the  price  of  every 
home  commodity. 

Secondly,  taxes  upon  the  necessaries  of  life  have  nearly  the  same 
effect  upon  the  circumstances  of  the  people  as  a  poor  soil  and  a  bad 


2  58  SMITH 

climate.  Provisions  are  thereby  rendered  dearer  in  the  same  manner 
as  if  it  required  extraordinary  labour  and  expense  to  raise  them. 
As  in  the  natural  scarcity  arising  from  soil  and  climate  it  would 
be  absurd  to  direct  the  people  in  what  manner  they  ought  to  employ 
their  capitals  and  industry,  so  is  it  likewise  in  the  artificial  scarcity 
arising  from  such  taxes.  To  be  left  to  accommodate,  as  well  as  they 
could,  their  industry  to  their  situation,  and  to  fmd  out  those  em- 
ployments in  which,  notwithstanding  their  unfavourable  circum- 
stances, they  might  have  some  advantage  either  in  the  home  or  in 
the  foreign  market,  is  what  in  both  cases  would  evidently  be  most 
for  their  advantage.  To  lay  a  new  tax  upon  them,  because  they  are 
already  overburdened  with  taxes,  and  because  they  already  pay  too 
dear  for  the  necessaries  of  life,  to  make  them  likewise  pay  too  dear 
for  the  greater  part  of  other  commodities,  is  certainly  a  most  absurd 
way  of  making  amends. 

Such  taxes,  when  they  have  grown  up  to  a  certain  height,  are  a 
curse  equal  to  the  barrenness  of  the  earth  and  the  inclemency  of 
the  heavens ;  and  yet  it  is  in  the  richest  and  most  industrious  coun- 
tries that  they  have  been  most  generally  imposed.  No  other  coun- 
tries could  support  so  great  a  disorder.  As  the  strongest  bodies  only 
can  live  and  enjoy  health  under  an  unwholesome  regimen,  so  the 
nations  only  that  in  ^ery  sort  of  industry  have  the  greatest  natural 
and  acquired  advantages  can  subsist  and  prosper  under  such  taxes. 
Holland  is  the  country  in  Europe  in  which  they  abound  most,  and 
which  from  peculiar  circumstances  continues  to  prosper,  not  by 
means  of  them,  as  has  been  most  absurdly  supposed,  but  in  spite 
of  them. 

As  there  are  two  cases  in  which  it  will  generally  be  advantageous 
to  lay  some  burden  upon  foreign  for  the  encouragement  of  domestic 
industry,  so  there  are  two  others  in  which  it  may  sometimes  be  a 
matter  of  deliberation  ;  in  the  one,  how  far  it  is  proper  to  continue 
the  free  importation  of  certain  foreign  goods ;  and  in  the  other,  how 
far,  or  in  what  manner,  it  may  be  proper  to  restore  that  free  importa- 
tion after  it  has  been  for  some  time  interrupted. 

The  case  in  which  it  may  sometimes  be  a  matter  of  deliberation 
how  far  it  is  proper  to  continue  the  free  importation  of  certain 
foreign  goods  is,  when  some  foreign  nation  restrains  by  high  duties 
or  prohibitions  the  importation  of  some  of  our  manufactures  into 


OF  RESTRAINTS  UPON  IMPORTATION  259 

their  country.  Revenge  in  this  case  naturally  dictates  retaliation, 
and  that  we  should  impose  the  like  duties  and  prohibitions  upon  the 
importation  of  some  or  all  of  their  manufactures  into  ours.  Nations, 
accordingly,  seldom  fail  to  retaliate  in  this  manner.  The  French 
have  been  particularly  forward  to  favour  their  own  manufactures 
by  restraining  the  importation  of  such  foreign  goods  as  could  come 
into  competition  with  them.  In  this  consisted  a  great  part  of  the 
policy  of  Mr.  Colbert,  who,  notwithstanding  his  great  abilities, 
seems  in  this  case  to  have  been  imposed  upon  by  the  sophistry  of 
merchants  and  manufacturers,  who  are  always  demanding  a  monop- 
oly against  their  countrymen.  It  is  at  present  the  opinion  of  the 
most  intelligent  men  in  France  that  his  operations  of  this  kind  have 
not  been  beneficial  to  his  country.  That  minister,  by  the  tariff  of 
1667,  imposed  very  high  duties  upon  a  great  number  of  foreign 
manufactures.  Upon  his  refusing  to  moderate  them  in  favour  of  the 
Dutch,  they  in  1671  prohibited  the  importation  of  the  wines, 
brandies,  and  manufactures  of  France.  The  war  of  1672  seems  to 
have  been  in  part  occasioned  by  this  commercial  dispute.  The  peace 
of  Nimeguen  put  an  end  to  it  in  1678  by  moderating  some  of  those 
duties  in  favour  of  the  Dutch,  who  in  consequence  took  off  their 
prohibition.  It  was  about  the  same  time  that  the  French  and  Eng- 
lish began  mutually  to  oppress  each  other's  industry  by  the  like  duties 
and  prohibitions,  of  which  the  French,  however,  seem  to  have  set 
the  first  example.  The  spirit  of  hostility  which  has  subsisted  between 
the  two  nations  ever  since  has  hitherto  hindered  them  from  being 
moderated  on  either  side.  In  1697  the  English  prohibited  the  im- 
portation of  bonelace,  the  manufacture  of  Flanders.  The  govern- 
ment of  that  country,  at  that  time  under  the  dominion  of  Spain, 
prohibited  in  return  the  importation  of  English  woollens.  In  1700, 
the  prohibition  of  importing  bonelace  into  England  was  taken  off 
upon  condition  that  the  importation  of  English  woollens  into  Flan- 
ders should  be  put  on  the  same  footing  as  before. 

There  may  be  good  policy  in  retaliations  of  this  kind,  when 
there  is  a  probability  that  they  will  procure  the  repeal  of  the  high 
duties  or  prohibitions  complained  of.  The  recovery  of  a  great  for- 
eign market  will  generally  more  than  compensate  the  transitory 
inconveniency  of  paying  dearer  during  a  short  time  for  some  sorts 
of  goods.    To  judge  whether  such  retaliations  are  likely  to  produce 


2  6o  SMITH 

such  an  effect  does  not,  perhaps,  belong  so  much  to  the  science  of  a 
legislator,  whose  deliberations  ought  to  be  governed  by  general  prin- 
ciples which  are  always  the  same,  as  to  the  skill  of  that  insidious 
and  crafty  animal,  vulgarly  called  a  statesman  or  politician,  whose 
councils  are  directed  by  the  momentary  fluctuations  of  affairs.  When 
there  is  no  probability  that  any  such  repeal  can  be  procured,  it 
seems  a  bad  method  of  compensating  the  injury  done  to  certain 
classes  of  our  people  to  do  another  injury  ourselves,  not  only  to 
those  classes,  but  to  almost  all  the  other  classes  of  them.  When  our 
neighbours  prohibit  some  manufacture  of  ours,  we  generally  prohibit, 
not  only  the  same,  for  that  alone  would  seldom  affect  them  con- 
siderably, but  some  other  manufacture  of  theirs.  This  may  no  doubt 
give  encouragement  to  some  particular  class  of  workmen  among 
ourselves,  and  by  excluding  some  of  their  rivals,  may  enable  them 
to  raise  their  price  in  the  home  market.  Those  workmen,  however, 
who  suffered  by  our  neighbours'  prohibition  will  not  be  benefited 
by  ours.  On  the  contrary,  they  and  almost  all  the  other  classes  of 
our  citizens  will  thereby  be  obliged  to  pay  dearer  than  before  for 
certain  goods.  Every  such  law,  therefore,  imposes  a  real  tax  upon 
the  whole  country,  not  in  favour  of  that  particular  class  of  work- 
men who  were  injured  by  our  neighbours'  prohibition,  but  of  some 
other  class. 

The  case  in  which  it  may  sometimes  be  a  matter  of  deliberation, 
how  far,  or  in  what  manner,  it  is  proper  to  restore  the  free  importa- 
tion of  foreign  goods,  after  it  has  been  for  some  time  interrupted,  is, 
when  particular  manufactures,  by  means  of  high  duties  or  prohi- 
bitions upon  all  foreign  goods  which  can  come  into  competition  with 
them,  have  been  so  far  extended  as  to  employ  a  great  multitude  of 
hands.  Humanity  may  in  this  case  require  that  the  freedom  of  trade 
should  be  restored  only  by  slow  gradations,  and  with  a  good  deal  of 
reserve  and  circumspection.  Were  those  high  duties  and  prohibi- 
tions taken  away  all  at  once,  cheaper  foreign  goods  of  the  same  kind 
might  be  poured  so  fast  into  the  home  market  as  to  deprive  all  at 
once  many  thousands  of  our  people  of  their  ordinary  employment 
and  means  of  subsistence.  The  disorder  which  this  would  occasion 
might  no  doubt  be  very  considerable.  It  would  in  all  probability, 
however,  be  much  less  than  is  commonly  imagined,  for  the  two 
following   reasons:  — 


OF  RESTRAINTS  UPON  IMPORTATION  261 

First,  all  those  manufactures,  of  which  any  part  is  commonly 
exported  to  other  European  countries  without  a  bounty,  could  be 
very  little  affected  by  the  freest  importation  of  foreign  goods.  Such 
manufactures  must  be  sold  as  cheap  abroad  as  any  other  foreign 
goods  of  the  same  quality  and  kind,  and  consequently  must  be  sold 
cheaper  at  home.  They  would  still,  therefore,  keep  possession  of 
the  home  market,  and  though  a  capricious  man  of  fashion  might 
sometimes  prefer  foreign  wares,  merely  because  they  were  foreign, 
to  cheaper  and  better  goods  of  the  same  kind  that  were  made  at 
home,  this  folly  could,  from  the  nature  of  things,  extend  to  so  few 
that  it  could  make  no  sensible  impression  upon  the  general  employ- 
ment of  the  people.  But  a  great  part  of  all  the  different  branches 
of  our  woollen  manufacture,  of  our  tanned  leather,  and  of  our 
hardware,  are  annually  exported  to  other  European  countries  without 
any  bounty,  and  these  are  the  manufactures  which  employ  the 
greatest  number  of  hands.  The  silk,  perhaps,  is  the  manufacture 
which  would  suffer  the  most  by  this  freedom  of  trade,  and  after  it 
the  linen,  though  the  latter  much  less  than  the  former. 

Secondly,  though  a  great  number  of  people  should,  by  thus  restor- 
ing the  freedom  of  trade,  be  thrown  all  at  once  out  of  their  ordinary 
employment  and  common  method  of  subsistence,  it  would  by  no 
means  follow  that  they  would  thereby  be  deprived  either  of  employ- 
ment or  subsistence.  By  the  reduction  of  the  army  and  navy  at  the 
end  of  the  late  war,  more  than  a  hundred  thousand  soldiers  and  sea- 
men, a  number  equal  to  what  is  employed  in  the  greatest  manufac- 
tures, were  all  at  once  thrown  out  of  their  ordinary  employment ; 
but,  though  they  no  doubt  suffered  some  inconveniency,  they  were 
not  thereby  deprived  of  all  employment  and  subsistence.  The  greater 
part  of  the  seamen,  it  is  probable,  gradually  betook  themselves  to 
the  merchant-service  as  they  could  find  occasion,  and  in  the  mean- 
time both  they  and  the  soldiers  were  absorbed  in  the  great  mass  of  the 
people,  and  employed  in  a  great  variety  of  occupations.  Not  only 
no  great  convulsion,  but  no  sensible  disorder  arose  from  so  great  a 
change  in  the  situation  of  more  than  a  hundred  thousand  men,  all 
accustomed  to  the  use  of  arms,  and  many  of  them  to  rapine  and 
plunder.  The  number  of  vagrants  was  scarce  anywhere  sensibly 
increased  by  it,  even  the  wages  of  labour  were  not  reduced  by  it  in 
any  occupation,  so  far  as  I  have  been  able  to  learn,  except  in  that  of 


2  62   ■  SMITH 

seamen  in  the  merchant  service.  But  if  we  compare  together  the 
habits  of  a  soldier  and  of  any  sort  of  manufacturer,  we  shall  find 
that  those  of  the  latter  do  not  tend  so  much  to  disqualify  him  from 
being  employed  in  a  new  trade,  as  those  of  the  former  from  being 
employed  in  any.  The  manufacturer  has  always  been  accustomed 
to  look  for  his  subsistence  from  his  labour  only :  the  soldier  to 
expect  it  from  his  pay.  Application  and  industry  have  been  familiar 
to  the  one ;  idleness  and  dissipation  to  the  other.^  But  it  is  surely 
much  easier  to  change  the  direction  of  industry  from  one  sort  of 
labour  to  another  than  to  turn  idleness  and  dissipation  to  any.  To 
the  greater  part  of  manufactures  besides,  it  has  already  been  ob- 
served, there  are  other  collateral  manufactures  of  so  similar  a  nature 
that  a  workman  can  easily  transfer  his  industry  from  one  of  them 
to  another.  The  greater  part  of  such  workmen  too  are  occasionally 
employed  in  country  labour.  The  stock  which  employed  them  in  a 
particular  manufacture  before  will  still  remain  in  the  country  to 
employ  an  equal  number  of  people  in  some  other  way.  The  capital 
of  the  country  remaining  the  same,  the  demand  for  labour  will  like- 
wise be  the  same,  or  very  nearly  the  same,  though  it  may  be  exerted 
in  different  places  and  for  different  occupations.  Soldiers  and  sea- 
men, indeed,  when  discharged  from  the  king's  service,  are  at  liberty 
to  exercise  any  trade,  within  any  town  or  place  of  Great  Britain  or 
Ireland.  Let  the  same  natural  liberty  of  exercising  what  species  of 
industry  they  please,  be  restored  to  all  his  iVIajesty's  subjects,  in  the 
same  manner  as  to  soldiers  and  seamen ;  that  is,  break  down  the 
exclusive  privileges  of  corporations,  and  repeal  the  statute  of  appren- 
ticeship, both  which  are  real  encroachments  upon  natural  liberty, 
and  add  to  these  the  repeal  of  the  law  of  settlements,  so  that  a  poor 
workman,  when  thrown  out  of  employment  either  in  one  trade  or  in 
one  place,  may  seek  for  it  in  another  trade  or  in  another  place 
without  the  fear  either  of  a  prosecution  or  of  a  removal,  and  neither 
the  j)ublic  nor  the  individuals  will  suffer  much  more  from  the  occa- 
sional disbanding  some  particular  classes  of  manufacturers  than 
from  that  of  soldiers.  Our  manufacturers  have  no  doubt  great  merit 
with  their  country,  but  they  cannot  have  more  than  those  who  defend 
it  with  their  blood,  nor  deserve  to  be  treated  with  more  delicacy. 

To  expect,   indeed,  that   the   freedom  of  trade  should   ever  be 
entirely  restored  in  Great   Britain  is  as  absurd  as  to  expect  that 


OF  RESTRAINTS  UPON  IMPORTATION  263 

an  Oceana  or  Utopia  should  ever  be  established  in  it.  Not  only 
the  prejudices  of  the  public,  but  what  is  much  more  unconquer- 
able, the  private  interests  of  many  individuals,  irresistibly  oppose 
it.  Were  the  officers  of  the  army  to  oppose  with  the  same  zeal 
and  unanimity  any  reduction  in  the  numbers  of  forces  with  which 
master  manufacturers  set  themselves  against  every  law  that  is 
likely  to  increase  the  number  of  their  rivals  in  the  home  market ; 
were  the  former  to  animate  their  soldiers  in  the  same  manner  as 
the  latter  enflame  their  workmen  to  attack  with  violence  and  out- 
rage the  proposers  of  any  such  regulation,  to  attempt  to  reduce 
the  army  would  be  as  dangerous  as  it  has  now  become  to  attempt 
to  diminish  in  any  respect  the  monopoly  which  our  manufacturers 
have  obtained  against  us.  This  monopoly  has  so  much  increased 
the  number  of  some  particular  tribes  of  them  that,  like  an  over- 
grown standing  army,  they  have  become  formidable  to  the  govern- 
ment, and  upon  many  occasions  intimidate  the  legislature.  The 
member  of  parliament  who  supports  every  proposal  for  strength- 
ening this  monopoly  is  sure  to  acquire  not  only  the  reputation  of 
understanding  trade,  but  great  popularity  and  influence  with  an 
order  of  men  whose  numbers  and  wealth  render  them  of  great 
importance.  If  he  opposes  them,  on  the  contrary,  and  still  more 
if  he  has  authority  enough  to  be  able  to  thwart  them,  neither  the 
most  acknowledged  probity,  nor  the  highest  rank,  nor  the  great- 
est public  services  can  protect  him  from  the  most  infamous  abuse 
and  detraction,  from  personal  insults,  nor  sometimes  from  real 
danger,  arising  from  the  insolent  outrage  of  furious  and  dis- 
appointed  monopolists. 

The  undertaker  of  a  great  manufacture,  who,  by  the  home 
markets  being  suddenly  laid  open  to  the  competition  of  foreigners, 
should  be  obliged  to  abandon  his  .trade,  would  no  doubt  suffer 
very  considerably.  That  part  of  his  capital  which  had  usually 
been  employed  in  purchasing  materials  and  in  paying  his  workmen 
might,  without  much  difficulty,  perhaps,  find  another  employment. 
But  that  part  of  it  which  w^as  fixed  in  workhouses,  and  in  the 
instruments  of  trade,  could  scarce  be  disposed  of  without  con- 
siderable loss.  The  equitable  regard,  therefore,  to  his  interest 
requires  that  changes  of  this  kind  should  never  be  introduced 
suddenly,  but  slowly,  gradually,  and  after  a  very  long  warning. 


2  64  SMITH 

The  legislature,  were  it  possible  that  its  deliberations  could  be 
always  directed,  not  by  the  clamorous  importunity  of  partial  in- 
terests, but  by  an  extensive  view  of  the  general  good,  ought  upon 
this  very  account,  perhaps,  to  be  particularly  careful  neither  to 
establish  any  new  monopolies  of  this  kind,  nor  to  extend  further 
those  which  are  already  established.  Every  such  regulation  intro- 
duces some  degree  of  real  disorder  into  the  constitution  of  the  state, 
which  it  will  be  difficult  afterwards  to  cure  without  occasioning 
another  disorder. 

How  far  it  may  be  proper  to  impose  taxes  upon  the  importation 
of  foreign  goods,  in  order  not  to  prevent  their  importation  but 
to  raise  a  revenue  for  government,  I  shall  consider  hereafter  when 
I  come  to  treat  of  taxes.  Taxes  imposed  with  a  view  to  prevent, 
or  even  to  diminish  importation,  are  evidently  as  destructive  of 
the  revenue  of  the  customs  as  of  the  freedom  of  trade. 


IX 
MILL:  OF  TAXES  ON  COMMODITIES^ 


A  TAX  on  any  one  commodity,  whether  laid  on  its  production, 
its  importation,  its  carriage  from  place  to  place,  or  its  sale, 
and  whether  the  tax  be  a  fixed  sum  of  money  for  a  given  quantity 
of  the  commodity,  or  an  ad  valorem  duty,  will,  as  a  general  rule, 
raise  the  value  and  price  of  the  commodity  by  at  least  the  amount 
of  the  tax.  There  are  few  cases  in  which  it  does  not  raise  them  by 
more  than  that  amount.  In  the  first  place,  there  are  few  taxes  on 
production  on  account  of  which  it  is  not  found  or  deemed  neces- 
sary to  impose  restrictive  regulations  on  the  manufacturers  or 
dealers,  in  order  to  check  evasions  of  the  tax.  These  regulations 
are  always  sources  of  trouble  and  annoyance,  and  generally  of 
expense,  for  all  of  which,  being  peculiar  disadvantages,  the  pro- 
ducers or  dealers  must  have  compensation  in  the  price  of  their 
commodity.  These  restrictions  also  frequently  interfere  with  the 
processes  of  manufacture,  requiring  the  producer  to  carry  on  his 
operations  in  the  way  most  convenient  to  the  revenue,  though 
not  the  cheapest  or  most  efficient  for  purposes  of  production.  Any 
regulations  whatever,  enforced  by  law,  make  it  difficult  for  the 
producer  to  adopt  new  and  improved  processes.  Further,  the  ne- 
cessity of  advancing  the  tax  obliges  producers  and  dealers  to 
carry  on  their  business  with  larger  capitals  than  would  otherwise 
be  necessary,  on  the  whole  of  which  they  must  receive  the  ordinary 
rate  of  profit,  though  a  part  only  is  employed  in  defraying  the 
real  expenses  of  production  or  importation.  The  price  of  the 
article  must  be  such  as  to  afford  a  profit  on  more  than  its  natural 
value,  instead  of  a  profit  on  only  its  natural  value.  A  part  of 
the  capital  of  the  country,  in  short,  is  not  employed  in  production, 

ijohn   Stuart   Mill    (1806-1873),   Principles   of    Political    Economy    (1848), 
Bk.  V,  chap.  iv. 

265 


2  66  MILL 

but  in  advances  to  the  state,  repaid  in  the  price  of  goods ;  and 
the  consumers  must  give  an  indemnity  to  the  sellers,  equal  to  the 
profit  which  they  could  have  made  on  the  same  capital  if  really 
employed  in  production.  Neither  ought  it  to  be  forgotten,  that 
whatever  renders  a  larger  capital  necessary  in  any  trade  or  busi- 
ness, limits  the  competition  in  that  business ;  and  by  giving  some- 
thing like  a  monopoly  to  a  few  dealers,  may  enable  them  either 
to  keep  up  the  price  beyond  what  would  afford  the  ordinary  rate 
of  profit,  or  to  obtain  the  ordinary  rate  of  profit  with  a  less  degree 
of  exertion  for  improving  and  cheapening  their  commodity.  In 
these  several  modes,  taxes  on  commodities  often  cost  to  the  con- 
sumer, through  the  increased  price  of  the  article,  much  more  than 
they  bring  into  the  treasury  of  the  state.  There  is  still  another 
consideration.  The  higher  price  necessitated  by  the  tax,  almost 
always  checks  the  demand  for  the  commodity ;  and  since  there 
are  many  improvements  in  production  which,  to  make  them  prac- 
ticable, require  a  certain  extent  of  demand,  such  improvements 
are  obstructed,  and  many  of  them  prevented  altogether.  It  is  a 
well-known  fact,  that  the  branches  of  production  in  which  fewest 
improvements  are  made,  are  those  with  which  the  revenue  officer 
interferes ;  and  that  nothing,  in  general,  gives  a  greater  impulse 
to  improvements  in  the  production  of  a  commodity,  than  taking 
off  a  tax  which  narrowed  the  market   for  it. 

§  5.  We  have  hitherto  inquired  into  the  effects  of  taxes  on 
commodities,  on  the  assumption  that  they  are  levied  impartially 
on  every  mode  in  which  the  commodity  can  be  produced  or 
brought  to  market.  Another  class  of  considerations  is  opened,  if 
we  suppose  that  this  impartiality  is  not  maintained,  and  that  the 
tax  is  imposed,  not  on  the  commodity,  but  on  some  particular 
mode  of  obtaining  it. 

Suppose  that  a  commodity  is  capable  of  being  made  by  two 
different  processes ;  as  a  manufactured  commodity  may  be  pro- 
duced either  by  hand  or  by  steam-power;  sugar  may  be  made 
either  from  the  sugar-cane  or  from  beet-root,  cattle  fattened  either 
on  hay  and  green  crops,  or  on  oil-cake  and  the  refuse  of  breweries. 
It  is  the  interest  of  the  community,  that  of  the  two  methods, 
producers  should  adopt  that  which  produces   the   best  article  at 


OF  TAXES  ON  COMMODITIES  267 

the  lowest  price.  This  being  also  the  interest  of  the  producers, 
unless  protected  against  competition,  and  shielded  from  the  penal- 
ties of  indolence ;  the  process  most  advantageous  to  the  commu- 
nity is  that  which,  if  not  interfered  with  by  government,  they 
ultimately  find  it  to  their  advantage  to  adopt.  Suppose  however 
that  a  tax  is  laid  on  one  of  the  processes,  and  no  tax  at  all,  or 
one  of  smaller  amount,  on  the  other.  If  the  taxed  process  is  the  one 
which  the  producers  would  not  have  adopted,  the  measure  is  simply 
nugatory.  But  if  the  tax  falls,  as  it  is  of  course  intended  to  do, 
upon  the  one  which  they  would  have  adopted,  it  creates  an  artificial 
motive  for  preferring  the  untaxed  process,  though  the  inferior  of  the 
two.  If,  therefore,  it  has  any  effect  at  all,  it  causes  the  commodity 
to  be  produced  of  worse  quality,  or  at  a  greater  expense  of  labour ; 
it  causes  so  much  of  the  labour  of  the  community  to  be  wasted,  and 
the  capital  employed  in  supporting  and  remunerating  that  labour  to 
be  expended  as  uselessly,  as  if  it  were  spent  in  hiring  men  to  dig 
holes  and  fill  them  up  again.  This  waste  of  labour  and  capital 
constitutes  an  addition  to  the  cost  of  production  of  the  commodity, 
which  raises  its  value  and  price  in  a  corresponding  ratio,  and  thus 
the  owners  of  the  capital  are  indemnified.  The  loss  falls  on  the  con- 
sumers ;  though  the  capital  of  the  country  is  also  eventually  dimin- 
ished, by  the  diminution  of  their  means  of  saving,  and  in  some 
degree,  of  their  inducements  to  save. 

The  kind  of  tax,  therefore,  which  comes  under  the  general  de- 
nomination of  a  discriminating  duty,  transgresses  the  rule  that  taxes 
should  take  as  little  as  possible  from  the  tax-payer  beyond  what 
they  bring  into  the  treasury  of  the  state.  A  discriminating  duty 
makes  the  consumer  pay  two  distinct  taxes,  only  one  of  which  is 
paid  to  the  government,  and  that  frequently  the  less  onerous  of  the 
two.  If  a  tax  were  laid  on  sugar  produced  from  the  cane,  leaving 
the  sugar  from  beet-root  untaxed,  then  in  so  far  as  cane  sugar 
continued  to  be  used,  the  tax  on  it  would  be  paid  to  the  treasury, 
and  might  be  as  unobjectionable  as  most  other  taxes ;  but  if  cane 
sugar,  having  previously  been  cheaper  than  beet-root  sugar,  was 
now  dearer,  and  beet-root  sugar  was  to  any  considerable  amount 
substituted  for  it,  and  fields  laid  out  and  manufactories  established 
in  consequence,  the  government  would  gain  no  revenue  from  the  beet- 
root sugar,  while  the  consumers  of  it  would  pay  a  real  tax.    They 


2  68  MILL 

would  pay  for  beet-root  sugar  more  than  they  had  previously  paid  for 
cane  sugar,  and  the  difference  would  go  to  indemnify  producers  for  a 
portion  of  the  labour  of  the  country  actually  thrown  away,  in  produc- 
ing by  the  labour  of  (say)  three  hundred  men,  what  could  be  obtained 
by  the  other  process  with  the  labour  of  two  hundred. 

One  of  the  commonest  cases  of  discriminating  duties,  is  that  of  a 
tax  on  the  importation  of  a  commodity  capable  of  being  produced  at 
home,  unaccompanied  by  an  equivalent  tax  on  the  home  production. 
A  commodity  is  never  permanently  imported,  unless  it  can  be  ob- 
tained from  abroad  at  a  smaller  cost  of  labour  and  capital  on  the 
whole,  than  is  necessary  for  producing  it.  If,  therefore,  by  a  duty 
on  the  importation,  it  is  rendered  cheaper  to  produce  the  article 
than  to  import  it,  an  extra  quantity  of  labour  and  capital  is  expended, 
without  any  extra  result.  The  labour  is  useless,  and  the  capital  is 
spent  in  paying  people  for  laboriously  doing  nothing.  All  custom 
duties  which  operate  as  an  encouragement  to  the  home  production 
of  the  taxed  article,  are  thus  an  eminently  wasteful  mode  of  raising 
a  revenue.^ 

This  character  belongs  in  a  peculiar  degree  to  custom  duties  on 
the  produce  of  land,  unless  countervailed  by  excise  duties  on  the 
home  production.  Such  taxes  bring  less  into  the  public  treasury, 
compared  with  what  they  take  from  the  consumers,  than  any  other 
imposts  to  which  civilized  nations  are  usually  subject.  If  the  wheat 
produced  in  a  country  is  twenty  millions  of  quarters,  and  the  con- 
sumption twenty-one  millions,  a  million  being  annually  imported, 
and  if  on  this  million  a  duty  is  laid  which  raises  the  price  ten  shil- 
lings per  quarter,  the  price  which  is  raised  is  not  that  of  the  million 
only,  but  of  the  whole  twenty-one  millions.  Taking  the  most  fa- 
vourable, but  extremely  improbable  supposition,  that  the  importa- 
tion is  not  at  all  checked,  nor  the  home  production  enlarged,  the 
state  gains  a  revenue  of  only  half  a  million,  while  the  consumers 
are  taxed  ten  millions  and  a  half :  the  ten  millions  being  a  contribu- 
tion to  the  home  growers,  who  are  forced  by  competition  to  resign 
it  all  to  the  landlords.  The  consumer  thus  pays  to  the  owners  of 
land  an  additional  tax,  equal  to  twenty  times  that  which  he  pays  to 
the  state.  Let  us  now  suppose  that  the  tax  really  checks  importation. 
Suppose  importation  stopped  altogether  in  ordinary  years;  it  being 
found   that   the  million  of  quarters  can  be  obtained,  by  a  more 


OF  TAXES  ON  COMMODITIES  269 

elaborate  cultivation,  or  by  breaking  up  inferior  land,  at  a  less 
advance  than  ten  shillings  upon  the  previous  price — say,  for  instance, 
five  shillings  a  quarter.  The  revenue  now  obtains  nothing,  except 
from  the  extraordinary  imports  which  may  happen  to  take  place  in 
a  season  of  scarcity.  But  the  consumers  pay  every  year  a  tax  of  five 
shillings  on  the  whole  twenty-one  millions  of  quarters,  amounting  to 
5 1  millions  sterling.  Of  this  the  odd  250,000/,  goes  to  compensate 
the  growers  of  the  last  million  of  quarters  for  the  labour  and  capital 
wasted  under  the  compulsion  of  the  law.  The  remaining  five  millions 
go  to  enrich  the  landlords  as  before. 

Such  is  the  operation  of  what  are  technically  termed  Corn  Laws, 
when  first  laid  on ;  and  such  continues  to  be  their  operation,  so  long 
as  they  have  any  effect  at  all  in  raising  the  price  of  corn.  But  I  am 
by  no  means  of  opinion  that  in  the  long  run  they  keep  up  either 
prices  or  rents  in  the  degree  which  these  considerations  might  lead 
us  to  suppose.  What  we  have  said  respecting  the  effect  of  tithes 
and  other  taxes  on  agricultural  produce,  applies  in  a  great  degree 
to  corn  laws :  they  anticipate  artificially  a  rise  of  price  and  of  rent, 
which  would  at  all  events  have  taken  place  through  the  increase  of 
population  and  of  production.  The  difference  between  a  country 
without  corn  laws,  and  a  country  which  has  long  had  corn  laws, 
is  not  so  much  that  the  last  has  a  higher  price  or  a  larger  rental,  but 
that  it  has  the  same  price  and  the  same  rental  with  a  smaller  aggre- 
gate capital  and  a  smaller  population.  The  imposition  of  corn  laws 
raises  rents,  but  retards  that  progress  of  accumulation  which  would 
in  no  long  period  have  raised  them  fully  as  much.  The  repeal  of 
corn  laws  tends  to  lower  rents,  but  it  unchains  a  force  which,  in  a 
progressive  state  of  capital  and  population,  restores  and  even  in- 
creases the  former  amount.  There  is  every  reason  to  expect  that 
under  the  virtually  free  importation  of  agricultural  produce,  at  last 
extorted  from  the  ruling  powers  of  this  country,  the  price  of  food, 
if  population  goes  on  increasing,  will  gradually  but  steadily  rise; 
though  this  effect  may  for  a  time  be  postponed  by  the  strong  current 
which  in  this  country  has  set  in  (and  the  impulse  is  extending  itself 
to  other  countries)  towards  the  improvement  of  agricultural  science, 
and  its  increased  application  to  practice. 

What  we  have  said  of  duties  on  importation  generally,  is  equally 
applicable  to  discriminating  duties  which  favour  importation  from 


2  70  MILL 

one  place  or  in  one  particular  manner,  in  contradistinction  to  others  ; 
such  as  the  preference  given  to  the  produce  of  a  colony,  or  of  a 
country  with  which  there  is  a  commercial  treaty ;  or  the  higher 
duties  formerly  imposed  by  our  navigation  laws  on  goods  imported 
in  other  than  British  shipping.  Whatever  else  may  be  alleged  in 
favour  of  such  distinctions,  whenever  they  are  not  nugatory,  they 
are  economically  wasteful.  They  induce  a  resort  to  a  more  costly 
mode  of  obtaining  a  commodity,  in  lieu  of  one  less  costly,  and  thus 
cause  a  portion  of  the  labour  which  the  country  employs  in  providing 
itself  with  foreign  commodities,  to  be  sacrificed  without  return. 


MILL:  OF  INTERFERENCES  OF  GOVERNMENT 
GROUNDED  ON  ERRONEOUS  THEORIES^ 

Of  these  false  theories,  the  most  notable  is  the  doctrine  of  Pro- 
tection to  Native  Industry  ;  a  phrase  meaning  the  prohibition,  or 
the  discouragement  by  heavy  duties,  of  such  foreign  commodities 
as  are  capable  of  being  produced  at  home.  If  the  theory  involved 
in  this  system  had  been  correct,  the  practical  conclusions  grounded 
on  it  would  not  have  been  unreasonable.  The  theory  was,  that  to 
buy  things  produced  at  home  was  a  national  benefit,  and  the  intro- 
duction of  foreign  commodities,  generally  a  national  loss.  It  being 
at  the  same  time  evident  that  the  interest  of  the  consumer  is  to 
buy  foreign  commodities  in  preference  to  domestic  whenever  they 
are  either  cheaper  or  better,  the  interest  of  the  consumer  appeared 
in  this  respect  to  be  contrary  to  the  public  interest ;  he  was  certain, 
if  left  to  his  own  inclinations,  to  do  what  according  to  the  theory 
was  injurious  to  the  public. 

It  was  shown,  however,  in  our  analysis  of  the  effects  of  inter- 
national trade,  as  it  had  been  often  shown  by  former  writers,  that 
the  importation  of  foreign  commodities,  in  the  common  course  of 
traffic,  never  takes  place,  except  when  it  is,  economically  speaking, 
a  national  good,  by  causing  the  same  amount  of  commodities  to  be 
obtained  at  a  smaller  cost  of  labour  and  capital  to  the  country.  To 
prohibit,  therefore,  this  importation,  or  impose  duties  which  prevent 

iMUl,  Principles,  Bk.  V,  chap,  x,  §  i. 


PROTECTIONISM  271 

it,  is  to  render  the  labour  and  capital  of  the  country  less  efficient  in 
production  than  they  would  otherwise  be ;  and  compel  a  waste,  of 
the  difference  between  the  labour  and  capital  necessary  for  the  home 
production  of  the  commodity,  and  that  which  is  required  for  pro- 
ducing the  things  with  which  it  can  be  purchased  from  abroad.  The 
amount  of  national  loss  thus  occasioned  is  measured  by  the  excess 
of  the  price  at  which  the  commodity  is  produced,  over  that  at  which 
it  could  be  imported.  In  the  case  of  manufactured  goods  the  whole 
difference  between  the  two  prices  is  absorbed  in  indemnifying  the 
producers  for  waste  of  labour,  or  of  the  capital  which  supports 
that  labour.  Those  who  are  supposed  to  be  benefited,  namely  the 
makers  of  the  protected  articles,  (unless  they  form  an  exclusive  com- 
pany, and  have  a  monopoly  against  their  own  countrymen  as  well  as 
against  foreigners,)  do  not  obtain  higher  profits  than  other  people. 
All  is  sheer  loss,  to  the  country  as  well  as  to  the  consumer.  When 
the  protected  article  is  a  product  of  agriculture — the  waste  of  labour 
not  being  incurred  on  the  whole  produce,  but  only  on  what  may  be 
called  the  last  instalment  of  it — the  extra  price  is  only  in  part  an 
indemnity  for  waste,  the  remainder  being  a  tax  paid  to  the  landlords. 
The  restrictive  and  prohibitory  policy  was  originally  grounded  on 
what  is  called  the  Mercantile  System,  which,  representing  the  advan- 
tage of  foreign  trade  to  consist  solely  in  bringing  money  into  the 
country,  gave  artificial  encouragement  to  exportation  of  goods,  and 
discountenanced  their  importation.  The  only  exceptions  to  the  sys- 
tem were  those  required  by  the  system  itself.  The  materials  and 
instruments  of  production  were  the  subject  of  a  contrary  policy, 
directed,  however,  to  the  same  end ;  they  were  freely  imported,  and 
not  permitted  to  be  exported,  in  order  that  manufacturers,  being 
more  cheaply  supplied  with  the  requisites  of  manufacture,  might 
be  able  to  sell  cheaper,  and  therefore  to  export  more  largely.  For  a 
similar  reason,  importation  was  allowed  and  even  favoured,  when 
confined  to  the  productions  of  countries  which  were  supposed  to 
take  from  the  country  still  more  than  it  took  from  them,  thus 
enriching  it  by  a  favourable  balance  of  trade.  As  part  of  the  same 
system,  colonies  were  founded,  for  the  supposed  advantage  of  com- 
pelling them  to  buy  our  commodities,  or  at  all  events  not  to  buy 
those  of  any  other  country :  in  return  for  which  restriction,  we  were 
generally  willing  to  come  under  an  equivalent  obligation  with  respect 


272 


MILL 


to  the  staple  productions  of  the  colonists.  The  consequences  of  the 
theory  were  pushed  so  far,  that  it  was  not  unusual  even  to  give 
bounties  on  exportation,  and  induce  foreigners  to  buy  from  us 
rather  than  from  other  countries,  by  a  cheapness  which  we  artifi- 
cially produced,  by  paying  part  of  the  price  for  them,  out  of  our 
own  taxes.  This  is  a  stretch  beyond  the  point  yet  reached  by  any 
private  tradesman  in  his  competition  for  business.  No  shopkeeper, 
I  should  think,  ever  made  a  practice  of  bribing  customers  by  selling 
goods  to  them  at  a  permanent  loss,  making  it  up  to  himself  from 
other  funds  in  his  possession. 

The  principle  of  the  Mercantile  Theory  is  now  given  up  even 
by  writers  and  governments  who  still  cling  to  the  restrictive  system. 
Whatever  hold  that  system  has  over  men's  minds,  independently  of 
the  private  interests  exposed  to  real  or  apprehended  loss  by  its 
abandonment,  is  derived  from  fallacies  other  than  the  old  notion  of 
the  benefits  of  heaping  up  money  in  the  country.  The  most  effective 
of  these  is  the  specious  plea  of  employing  our  own  countrymen  and 
our  national  industry,  instead  of  feeding  and  supporting  the  indus- 
try of  foreigners.  The  answer  to  this,  from  the  principles  laid  down 
in  former  chapters,  is  evident.  Without  reverting  to  the  fundamen- 
tal theorem  discussed  in  an  early  part  of  the  present  treatise, 
respecting  the  nature  and  sources  of  employment  for  labour,  it  is 
sufficient  to  say,  what  has  usually  been  said  by  the  advocates  of 
free  trade,  that  the  alternative  is  not  between  employing  our  own 
people  and  foreigners,  but  between  employing  one  class  and  another 
of  our  own  people.  The  imported  commodity  is  always  paid  for, 
directly  or  indirectly,  with  the  produce  of  our  own  industry :  that 
industry  being,  at  the  same  time,  rendered  more  productive,  since, 
with  the  same  labour  and  outlay,  we  are  enabled  to  possess  ourselves 
of  a  greater  quantity  of  the  article.  Those  who  have  not  well  con- 
sidered the  subject  are  apt  to  suppose  that  our  exporting  an  equiva- 
lent in  our  own  produce,  for  the  foreign  articles  we  consume,  depends 
on  contingencies — on  the  consent  of  foreign  countries  to  make  some 
corresponding  relaxation  of  their  own  restrictions,  or  on  the  question 
whether  those  from  whom  we  buy  are  induced  by  that  circumstance 
to  buy  more  from  us ;  and  that,  if  these  things,  or  things  equivalent 
to  them,  do  not  happen,  the  payment  must  be  made  in  money.  Now, 
in  the  first  place,  there  is  nothing  more  objectionable  in  a  money 


PROTECTIONISM  273 

payment  than  in  payment  by  any  other  medium,  if  the  state  of  the 
market  makes  it  the  most  advantageous  remittance ;  and  the  money 
itself  was  first  acquired,  and  would  again  be  replenished,  by  the 
export  of  an  equivalent  value  of  our  own  products.  But,  in  the  next 
place,  a  very  short  interval  of  paying  in  money  would  so  lower 
prices  as  either  to  stop  a  part  of  the  importation,  or  raise  up  a  foreign 
demand  for  our  produce,  sufficient  to  pay  for  the  imports.  I  grant 
that  this  disturbance  of  the  equation  of  international  demand  would 
be  in  some  degree  to  our  disadvantage,  in  the  purchase  of  other 
imported  articles ;  and  that  a  country  which  prohibits  some  foreign 
commodities,  does,  coEteris  paribus,  obtain  those  which  it  does  not 
prohibit,  at  a  less  price  than  it  would  otherwise  have  to  pay.  To 
express  the  same  thing  in  other  words ;  a  country  which  destroys  or 
prevents  altogether  certain  branches  of  foreign  trade,  thereby  anni- 
hilating a  general  gain  to  the  world,  which  would  be  shared  in  some 
proportion  between  itself  and  other  countries — does,  in  some  cir- 
cumstances, draw  to  itself,  at  the  expense  of  foreigners,  a  larger 
share  than  would  else  belong  to  it  of  the  gain  arising  from  that 
portion  of  its  foreign  trade  which  it  suffers  to  subsist.  But  even 
this  it  can  only  be  enabled  to  do,  if  foreigners  do  not  maintain  equiv- 
alent prohibitions  or  restrictions  against  its  commodities.  In  any 
case,  the  justice  or  expediency  of  destroying  one  of  two  gains,  in 
order  to  engross  a  rather  larger  share  of  the  other,  does  not  require 
much  discussion ;  the  gain,  too,  which  is  destroyed,  being,  in  propor- 
tion to  the  magnitude  of  the  transactions,  the  larger  of  the  two, 
since  it  is  the  one  which  capital,  left  to  itself,  is  supposed  to  seek 
by  preference. 

Defeated  as  a  general  theory,  the  Protectionist  doctrine  finds 
support  in  some  particular  cases,  from  considerations  which,  when 
really  in  point,  involve  greater  interests  than  mere  saving  of  labour ; 
the  interests  of  national  subsistence  and  of  national  defence.  The 
discussions  on  the  Corn  Laws  have  familiarized  everybody  with  the 
plea,  that  we  ought  to  be  independent  of  foreigners  for  the  food  of 
the  people ;  and  the  Navigation  Laws  were  grounded,  in  theory  and 
profession,  on  the  necessity  of  keeping  up  a  ''nursery  of  seamen" 
for  the  navy.  On  this  last  subject  I  at  once  admit,  that  the  object 
is  worth  the  sacrifice ;  and  that  a  country  exposed  to  invasion  by 
sea,  if  it  cannot  otherwise  have  sufficient  ships  and  sailors  of  its 


2  74 


MILL 


own  to  secure  the  means  of  manning  on  an  emergency  an  adequate 
fleet,  is  quite  right  in  obtaining  those  means,  even  at  an  economical 
sacrifice  in  point  of  cheapness  of  transport.  When  the  English 
navigation  laws  were  enacted,  the  Dutch,  from  their  maritime  skill 
and  their  low  rate  of  profit  at  home,  were  able  to  carry  for  other 
nations,  England  included,  at  cheaper  rates  than  those  nations  could 
carry  for  themselves :  which  placed  all  other  countries  at  a  great 
comparative  disadvantage  in  obtaining  experienced  seamen  for  their 
ships  of  war.  The  Navigation  Laws,  by  which  this  deficiency  was 
remedied,  and  at  the  same  time  a  blow  struck  against  the  maritime 
power  of  a  nation  with  which  England  was  then  frequently  engaged 
in  hostilities,  were  probably,  though  economically  disadvantageous, 
politically  expedient.  .  .  . 

With  regard  to  subsistence,  the  plea  of  the  Protectionists  has  been 
so  often  and  so  triumphantly  met,  that  it  requires  little  notice  here. 
That  country  is  the  most  steadily  as  well  as  the  most  abundantly 
supplied  with  food,  which  draws  its  supplies  from  the  largest  surface. 
It  is  ridiculous  to  found  a  general  system  of  policy  on  so  improbable 
a  danger  as  that  of  being  at  war  with  all  the  nations  of  the  world 
at  once;  or  to  suppose  that,  even  if  inferior  at  sea,  a  whole  country 
could  be  blockaded  like  a  town,  or  that  the  growers  of  food  in 
other  countries  would  not  be' as  anxious  not  to  lose  an  advantageous 
market,  as  we  should  be  not  to  be  deprived  of  their  corn.  On  the 
subject,  however,  of  subsistence,  there  is  one  point  which  deserves 
more  especial  consideration.  In  cases  of  actual  or  apprehended 
scarcity,  many  countries  of  Europe  are  accustomed  to  stop  the 
exportation  of  food.  Is  this,  or  not,  sound  policy?  There  can  be 
no  doubt  that  in  the  present  state  of  international  morality,  a  people 
cannot,  any  more  than  an  individual,  be  blamed  for  not  starving  itself 
to  feed  others.  But  if  the  greatest  amount  of  good  to  mankind 
on  the  whole,  were  the  end  aimed  at  in  the  maxims  of  international 
conduct,  such  collective  churlishness  would  certainly  be  condemned 
by  them.  Suppose  that  in  ordinary  circumstances  the  trade  in  food 
were  perfectly  free,  so  that  the  price  in  one  country  could  not  ha- 
bitually exceed  that  in  any  other  by  more  than  the  cost  of  carriage, 
together  with  a  moderate  profit  to  the  importer.  A  general  scarcity 
ensues,  affecting  all  countries,  but  in  unequal  degrees.  If  the  price 
rose  in  one  country  more  than  in  others^  it  would  be  a  proof  that 


PROTECTIONISM  275 

in  that  country  the  scarcity  was  severest,  and  that  by  permitting 
food  to  go  freely  thither  from  any  other  country,  it  would  be  spared 
from  a  less  urgent  necessity  to  relieve  a  greater.  When  the  interests, 
therefore,  of  all  countries  are  considered,  free  exportation  is  desir- 
able. To  the  exporting  country  considered  separately,  it  may,  at 
least  on  the  particular  occasion,  be  an  inconvenience:  but  taking 
into  account  that  the  country  which  is  now  the  giver,  will  in  some 
future  season  be  the  receiver,  and  the  one  that  is  benefited  by  the 
freedom,  I  cannot  but  think  that  even  to  the  apprehension  of  food- 
rioters  it  might  be  made  apparent,  that  in  such  cases  they  should  do 
to  others  what  they  would  wish  done  to  themselves. 

In  countries  in  which  the  system  of  Protection  is  declining,  but 
not  yet  wholly  given  up,  such  as  the  United  States,^  a  doctrine  has 
come  into  notice  which  is  a  sort  of  compromise  between  free  trade 
and  restriction,  namely,  that  protection  for  protection's  sake  is 
improper,  but  that  there  is  nothing  objectionable  in  having  as  much 
protection  as  may  incidentally  result  from  a  tariff  framed  solely 
for  revenue.  Even  in  England,  regret  is  sometimes  expressed  that 
a  "moderate  fixed  duty"  was  not  preserved  on  corn,  on  account  of 
the  revenue  it  would  yield.  Independently,  however,  of  the  general 
impolicy  of  taxes  on  the  necessaries  of  life,  this  doctrine  overlooks 
the  fact,  that  revenue  is  received  only  on  the  quantity  imported,  but 
that  the  tax  is  paid  on  the  entire  quantity  consumed.  To  make  the 
public  pay  much  that  the  treasury  may  receive  a  little,  is  no  eligible 
mode  of  obtaining  a  revenue.  In  the  case  of  manufactured  articles 
the  doctrine  involves  a  palpable  inconsistency.  The  object  of  the 
duty  as  a  means  of  revenue,  is  inconsistent  with  its  affording,  even 
incidentally,  any  protection.  It  can  only  operate  as  protection  in 
so  far  as  it  prevents  importation ;  and  to  whatever  degree  it  prevents 
importation,  it  affords  no  revenue. 

The  only  case  in  which,  on  mere  principles  of  political  economy, 
protecting  duties  can  be  defensible,  is  when  they  are  imposed  tem- 
porarily (especially  in  a  young  and  rising  nation)  in  hopes  of 
naturalizing  a  foreign  industry,  in  itself  perfectly  suitable  to  the 
circumstances  of  the  country.  The  superiority  of  one  country  over 
another  in  a  branch  of  production,  often  arises  only  from  having 
begun  it  sooner.    There  may  be  no  inherent  advantage  on  one  part,  or 

1  Written  in  1848.  (Ed.) 


2  76  MILL 

disadvantage  on  the  other,  but  only  a  present  superiority  of  acquired 
skill  and  experience.  A  country  which  has  this  skill  and  experience 
yet  to  acquire,  may  in  other  respects  be  better  adapted  to  the  pro- 
duction than  those  which  were  earlier  in  the  field  ;  and  besides,  it 
is  a  just  remark  of  Mr.  Rae,  that  nothing  has  a  greater  tendency 
to  promote  improvements  in  any  branch  of  production,  than  its 
trial  under  a  new  set  of  conditions.  But  it  cannot  be  expected  that 
individuals  should,  at  their  own  risk,  or  rather  to  their  certain 
loss,  introduce  a  new  manufacture,  and  bear  the  burden  of  carrying 
it  on,  until  the  producers  have  been  educated  up  to  the  level  of 
those  with  whom  the  processes  are  traditional.  A  protecting  duty, 
continued  for  a  reasonable  time,  will  sometimes  be  the  least  incon- 
venient mode  in  which  the  nation  can  tax  itself  for  the  support  of 
such  an  experiment.  But  the  protection  should  be  confined  to  cases 
in  which  there  is  good  ground  of  assurance  that  the  industry  which 
it  fosters  will  after  a  time  be  able  to  dispense  with  it ;  nor  should 
the  domestic  producers  ever  be  allowed  to  expect  that  it  will  be 
continued  to  them  beyond  the  time  necessary  for  a  fair  trial  of  what 
they  are  capable  of  accomplishing. 

There  is  only  one  part  of  the  Protectionist  scheme  which  requires 
any  further  notice :  its  policy  towards  colonies,  and  foreign  depend- 
encies ;  that  of  compelling  them  to  trade  exclusively  with  the  domi- 
nant country.  A  country  which  thus  secures  to  itself  an  extra 
foreign  demand  for  its  commodities,  undoubtedly  gives  itself  some 
advantage  in  the  distribution  of  the  general  gains  of  the  commer- 
cial world.  Since,  however,  it  causes  the  industry  and  capital  of 
the  colony  to  be  diverted  from  channels,  which  are  proved  to  be 
the  most  productive,  inasmuch  as  they  are  those  into  which  industry 
and  capital  spontaneously  tend  to  flow :  there  is  a  loss,  on  the  whole, 
to  the  productive  powers  of  the  world,  and  the  mother  country  does 
not  gain  so  much  as  she  makes  the  colony  lose.  If,  therefore,  the 
mother  country  refuses  to  acknowledge  any  reciprocity  of  obliga- 
tions, she  imposes  a  tribute  on  the  colony  in  an  indirect  mode, 
greatly  more  oppressive  and  injurious  than  the  direct.  But  if,  with 
a  more  equitable  spirit,  she  submits  herself  to  corresponding  restric- 
tions for  the  benefit  of  the  colony,  the  result  of  the  whole  transactioja^, 
is  the  ridiculous  one,  that  each  party  loses  much,  in  order  that  the 
other  may  gain  a  little. 


X 

LIST:  INTRODUCTION  TO  THE  NATIONAL 
SYSTEM  OF  POLITICAL  ECONOMY^ 

*********** 

IN  CONSIDERING  the  economic  development  of  the  various 
nations,  we  may  take  for  granted  the  following  main  evolu- 
tionary stages:  barbarism,  pastoral  state,  agricultural  stage,  period 
of  agriculture  and  manufacturing,  and  period  of  agriculture,  manu- 
facturing, and  commerce. 

Obviously,  a  nation  which  presents  a  large  population,  occupying 
an  extensive  territory  provided  with  diversified  natural  resources, 
and  combining  agriculture,  manufactures,  and  navigation  with  do- 
mestic and  foreign  trade,  is  far  more  highly  civilized,  more  highly 
developed  politically,  and  more  powerful  than  a  nation  which  is 
purely  agricultural.  Manufactures  are  the  basis  of  domestic  and 
foreign  trade,  of  navigation,  and  of  improved  agriculture — and  hence 
of  civilization  and  political  power ;  and  a  nation  which  should  suc- 
ceed in  monopolizing  the  entire  manufacturing  of  the  globe  and  in 
inhibiting  the  economic  development  of  other  nations  to  such  an 
extent  that  they  could  produce  only  agricultural  commodities  and 
raw  materials  and  carry  on  only  the  most  indispensable  local  indus- 
tries, would  necessarily  achieve  universal  dominion. 

Every  nation  which  values  independence  and  continued  existence 
must,  accordingly,  strive  to  attain  as  soon  as  possible  a  higher  state 
of  civilization — to  combine  as  soon  as  possible,  within  the  limits 
of  its  own  territory,  agriculture,  manufactures,  navigation,  and  trade. 

The  transitions  of  a  people  from  a  state  of  barbarism  to  a  pastoral 
life,  and  from  the  pastoral  stage  to  that  of  agriculture,  and  the  first 
stages  of  agricultural  progress,  are  best  effected  through  free  trade 
with  civilized  peoples ;  that  is,  with  nations  devoted  to  manu- 
facture and  trade. 

iFriedrich  List  (1789-1846),  National  System  of  Political  Economy  (1841), 
Introduction  (Vol.  I,  pp.  63-76,  of  Jena  edition,  1910). 

277 


2  78  LIST 

The  transition  of  agricultural  peoples  to  the  status  of  nations 
engaged  in  agriculture,  manufacturing,  and  trade  could  occur  spon- 
taneously, under  a  system  of  free  intercommunication,  only  in  case 
the  nations  challenged  to  develop  their  power  in  the  field  of  manu- 
factures had  all  undergone,  simultaneously,  the  same  process  of 
development,  had  not  sought  to  hamper  each  other  in  their  economic 
expansion,  and  did  not  hinder  the  progress  of  one  another  by  means 
of  war  and  customs-systems. 

But  as  individual  nations,  favored  by  special  conditions,  secured 
an  advantage  over  other  nations  in  manufacturing,  trade,  and  navi- 
gation, as  they  perceived  at  an  early  stage,  in  connection  with  these 
achievements,  the  most  effective  means  of  securing  and  maintaining 
political  ascendancy  over  other  peoples,  they  took  steps  calculated, 
then  as  now,  to  secure  a  monopoly  of  manufacturing  and  trade  and 
to  hamper  the  progress  of  nations  less  advanced.  The  network  of 
these  arrangements  (prohibition  of  imports,  import  duties,  restric- 
tions upon  navigation,  export  subsidies)  is  called  the  tariff  system. 

In  consequence  of  priority  of  development  on  the  part  of  other 
nations,  foreign  customs-systems,  and  war,  peoples  less  highly 
developed  are  compelled  to  seek  within  themselves  the  means  of 
effecting  the  transition  from  the  agricultural  to  the  manufacturing 
stage  and  to  restrict  trade  with  more  advanced  nations  which  are 
striving  to  achieve  a  monopoly  of  manufactures — in  so  far  as  this 
trade  is  disadvantageous  to  them — by  establishing  a  customs- 
system  of  their  own. 

The  customs-system,  accordingly,  is  not,  as  has  been  asserted, 
an  invention  of  speculative  thinkers ;  it  is  a  natural  consequence 
of  the  striving  of  nations  for  guaranties  of  continued  existence  and 
prosperity  or  for  preponderance  of  power. 

But  this  endeavor  is  legitimate  and  rational  only  in  so  far  as  it 
furthers  the  economic  development  of  the  nation  in  question  and 
does  not  militate  against  the  realization  of  the  higher  purpose  of 
mankind, —  the  world-federation  of  the  future. 

Just  as  human  society  may  be  viewed  from  two  different  stand- 
points,—  the  cosmopolitan,  which  regards  humanity  as  a  whole, 
and  the  political,  which  stresses  special  national  interests  and  condi- 
tions,— so  all  economics,  that  of  private  individuals  as  well  as  that 
of  society,  may  be  regarded  from  two  fundamental  points  of  view: 


NATIONAL  SYSTEM  OF  POLITICAL  ECONOMY     279 

namely,  with  reference  to  the  personal,  social,  and  material  forces 
whereby  wealth  is  produced,  or  from  the  standpoint  of  the  exchange- 
value  of  material  commodities. 

We  have  to  deal,  accordingly,  with  a  cosmopolitan  and  a  political 
economy,  a  theory  of  exchange-values  and  a  theory  of  productive 
forces, — doctrines  which  are  essentially  dissimilar  and  which  must 
be  developed  independently. 

The  productive  forces  of  nations  are  not  determined  alone  by  the 
industry,  thrift,  morality,  and  intelligence  of  individuals,  or  by  the 
possession  of  natural  resources,  but  also  by  social,  political,  and  civic 
institutions  and  laws, — above  all,  by  the  guaranties  of  national  per- 
petuity, independence,  and  power.  However  diligent,  thrifty,  ingenious, 
enterprising,  moral,  and  intelligent  may  be  the  individuals  in  question, 
the  nation  will  never  be  able,  without  national  unity,  division  of 
labor,  and  cooperation  in  the  organization  of  productive  forces,  to 
achieve  a  high  degree  of  prosperity  and  power  or  to  guarantee  the 
continued  possession  of  its  spiritual,  social,  and  material  assets. 

The  principle  of  division  of  labor  has  hitherto  been  imperfectly 
understood.  Its  productivity  does  not  lie  merely  in  the  distribution 
of  different  business  operations  among  several  individuals,  but  to  a 
still  greater  extent  in  the  mental  and  physical  union  of  these  indi- 
viduals for  the  attainment  of  a  common  purpose. 

This  principle  is,  accordingly,  applicable  not  merely  to  the  indi- 
vidual factory  or  farm  but  also  to  the  entire  agricultural,  manufac- 
turing, and  commercial  resources  of  a  nation. 

Division  of  labor  and  union  of  the  productive  forces  on  a  national 
scale  exist  when  the  intellectual  and  material  aspects  of  a  nation's 
productivity  stand  in  proper  relation  to  each  other,  and  agriculture, 
industry,  and  trade  are  uniformly  and  harmoniously  developed. 

In  the  case  of  a  purely  agricultural  people — even  one  which  main- 
tains free  intercourse  with  manufacturing  and  trading  nations — a 
large  portion  of  the  productive  forces  and  natural  resources  remains 
undeveloped.  Its  intellectual  and  political  expansion  and  its  means  of 
self-defense  are  restricted.  Extensive  shipping  and  trade  are  out  of 
the  question.  Its  prosperity,  in  so  far  as  this  depends  on  intercom- 
munication with  other  nations,  is  subject  to  interruption  and  dis- 
turbance and  may  even  be  destroyed  in  consequence  of  the  measures 
adopted  by  foreign  countries  and  of  war. 


2  8o  LIST 

Manufacturing  strength,  on  the  other  hand,  promotes  science,  art, 
and  political  progress ;  increases  the  population  and  heightens  na- 
tional well-being ;  augments  the  resources  of  the  state  and  the 
national  strength ;  enables  it  to  multiply  its  trade-connections  in  all 
parts  of  the  earth  and  to  establish  colonies ;  promotes  its  fisheries 
and  shipping ;  and  supports  its  navy.  It  is  only  by  this  means  that 
domestic  agriculture  is  raised  to  a  high  plane  of  development. 

The  forces  represented  by  agriculture  and  manufactures  as  pur- 
sued by  one  and  the  same  nation,  under  the  same  political  jurisdic- 
tion, stand  in  a  relation  of  perpetual  harmony,  their  interaction  not 
being  subject  to  disturbance  in  consequence  of  war  or  foreign  trade- 
measures  ;  and  they  thus  guarantee  to  the  nation  increasing  pros- 
perity and  constant  progress  in  the  direction  of  higher  civilization 
and  greater  power. 

While  the  forces  represented  by  manufactures  and  agriculture  are 
determined  by  nature,  the  conditions  are  dissimilar. 

The  countries  best  suited,  with  reference  to  natural  resources,  to 
the  development  of  manufactures  are  those  of  the  temperate  zone,  as 
the  climate  of  this  region  is  adapted  to  mental  and  physical  exertion. 

While  the  countries  of  the  torrid  zone  are  unfavorably  situated 
with  respect  to  manufactures,  they  possess,  on  the  other  hand,  a 
natural  monopoly  in  valuable  agricultural  products  such  as  appeal 
to  the  countries  of  the  temperate  zone.  The  exchange  of  products 
manufactured  in  the  temperate  zone  in  return  for  the  agricultural 
products  of  the  torrid  zone  (colonial  products)  gives  rise  chiefly  to 
cosmopolitan  division  of  labor  and  union  of  productive  forces — to 
the  imposing  proportions  of  international  trade. 

It  would  be  decidedly  to  the  disadvantage  of  a  country  situated 
in  the  torrid  zone  to  attempt  to  develop  independent  manufacturing 
resources.  Not  fitted  by  nature  for  such  a  task,  an  increase  in 
material  wealth  and  an  advance  in  civilization  are  far  more  readily 
achieved  through  the  exchange  of  its  agricultural  products  for  the 
manufactured  articles  of  the  temperate  zone. 

The  result,  of  course,  is  that  the  countries  of  the  torrid  zone  be- 
come dependent  upon  those  of  the  temperate  zone.  But  this  depend- 
ence does  not  prove  a  disadvantage,  and  is  in  fact  neutralized,  in 
case  a  number  of  nations  arise  in  the  temperate  zone,  whose  relations 
serve  to  create  a  balance  of  power  in  the  field  of  manufactures,  trade, 


( 

NATIONAL  SYSTEM  OF  POLITICAL  ECONOMY     281 

shipping,  and  political  influence,  and  which  not  only  find  it  to  their 
interest  but  also  within  their  power  to  prevent  any  one  of  the  group 
from  taking  undue  advantage  of  its  superiority  with  reference  to 
the  weaker  nations  of  the  torrid  zone.  This  preponderance  of  power 
would  be  a  source  of  danger  and  a  detriment  only  in  case  manufac- 
turing resources,  trade  and  navigation  on  a  large  scale,  and  sea- 
power  were  to  be  monopolized  by  a  single  nation. 

Nations,  on  the  other  hand,  which  occupy  an  extensive  territory 
in  the  temperate  zone,  provided  with  diversified  natural  resources, 
would  be  neglecting  one  of  the  richest  sources  of  prosperity,  civiliza- 
tion, and  power  in  case  they  did  not  strive  to  effect  on  a  national 
scale  division  of  labor  and  a  union  of  productive  forces,  as  soon  as 
they  secured  the  requisite  economic,  intellectual,  and  social  resources. 

Among  economic  resources  we  include  a  fairly  advanced  stage  of 
agriculture,  such  as  can  no  longer  be  promoted  to  any  considerable 
extent  through  the  exportation  of  its  products.  By  intellectual 
resources  is  meant  a  high  degree  of  cultivation  on  the  part  of  indi- 
viduals. By  social  resources  are  meant  institutions  and  laws  which 
guarantee  to  the  citizen  security  of  person  and  property  and  the 
free  exercise  of  his  intellectual  and  physical  powers — institutions 
which  regulate  and  facilitate  intercommunication,  and  the  absence 
of  those  which  exercise  a  disturbing  effect  upon  industry,  freedom, 
intelligence,  and  morality,  as  in  the  case  of  the  feudal  system. 

It  is  to  the  advantage  of  such  a  nation  to  strive  first  of  all  to 
supply  its  own  market  with  its  own  manufactured  products,  and 
then  to  establish  ever  closer  connections  with  the  countries  of  the 
torrid  zone,  exporting  to  them  in  its  own  ships  articles  of  manufac- 
ture and  receiving  in  return  the  products  of  the  warmer  zone. 

In  comparison  with  this  trade  between  the  manufacturing  coun- 
tries of  the  temperate  and  the  agricultural  countries  of  the  torrid 
zone,  all  international  trade,  with  the  exception  of  a  few  articles 
such  as  wine,  is  of  minor  importance. 

The  production  of  raw  materials  and  foodstuffs  on  the  part  of 
large  nations  in  the  temperate  zone  is  of  no  great  consequence 
except  for  purposes  of  domestic  trade.  The  agriculture  of  a  nation 
with  scanty  resources  or  on  a  low  plane  of  civilization  may  be  con- 
siderably promoted,  in  the  earliest  stages  of  the  nation's  develop- 
ment, through  the  exportation  of  grain,  wine,  flax,  hemp,  wool,  etc.; 


2  82  LIST 

but  this  process  has  never  served  as  yet  to  guarantee  to  a  great  nation 
wealth,  civilization,  and  power. 

It  may  be  stated  as  a  general  rule  that  the  wealth  and  power  of 
a  nation  are  proportional  to  the  quantity  of  manufactured  products 
exported  and  of  raw  materials  imported  by  that  nation,  and  to  the 
volume  of  products  of  the  torrid  zone  which  it  consumes. 

The  products  of  the  torrid  zone  serve  the  manufacturing  countries 
of  the  temperate  zone  not  merely  as  productive  materials  or  food- 
stuffs but  chiefly  as  a  means  of  stimulating  production  in  the  fields 
of  agriculture  and  manufacturing.  It  is  always  found,  accordingly, 
that  that  nation  which  consumes  the  greatest  quantities  of  products 
from  the  torrid  zone  likewise  produces  and  consumes,  proportion- 
ately, the  largest  volume  of  domestic  manufactured  and  agricultural 
commodities. 

In  the  economic  development  of  nations  through  international 
trade,  we  find  accordingly  four  distinct  periods :  in  the  first,  domestic 
agriculture  is  fostered  by  means  of  the  importation  of  foreign  manu- 
factures and  the  exportation  of  domestic  agricultural  produce  and 
raw  materials ;  in  the  second,  domestic  manufactures  are  developed 
side  by  side  with  the  importation  of  commodities  of  foreign  manu- 
facture ;  in  the  third,  the  domestic  market  is  supplied  for  the  most 
part  with  domestic  products ;  and  in  the  fourth,  there  is  an  extensive 
exportation  of  commodities  of  domestic  manufacture,  coupled  with 
the  importation  of  foreign  raw  materials  and  agricultural  products. 

The  tariff  system,  as  a  means  of  promoting  the  economic  develop- 
ment of  the  nation  through  the  regulation  of  foreign  trade,  must 
be  guided  constantly  by  the  principle  of  the  industrial  training 
of  the  nation. 

It  is  vain  to  endeavor  to  promote  domestic  agriculture  by  means  of 
protective  tariffs,  as  its  progress  is  dependent  upon  domestic  manu- 
factures, and  as  the  development  of  these  manufactures  is  hampered 
by  the  exclusion  of  foreign  raw  materials  and  agricultural  products. 

The  economic  development  of  nations  which  occupy  a  low  plane 
of  intelligence  and  civilization,  or  which,  in  proportion  to  the  extent 
and  productivity  of  their  territory,  still  present  a  scanty  population, 
is  best  achieved  through  free  trade  with  highly  civilized  nations 
characterized  by  wealth  and  industry.  Any  limitation  of  trade  on 
the  part  of  such  a  nation,  prescribed  with  a  view  to  create  its  own 


NATIONAL  SYSTEM  OF  POLITICAL  ECONOMY     283 

manufacturing  resources,  is  premature,  operating  to  the  disadvantage 
not  only  of  mankind  as  a  whole  but  also  of  its  own  efforts  to  progress. 
Only  when  the  intellectual,  political,  and  economic  development  of 
the  nation,  due  to  free  trade,  has  reached  a  point  where  the  importa- 
tion of  foreign  manufactures  and  the  lack  of  an  adequate  market 
for  its  own  products  result  in  checking  further  progress,  is  it  justi- 
fied in  resorting  to  protective  measures. 

A  nation  whose  territory  is  of  limited  extent,  lacking  diversified 
natural  resources,  and  not  properly  rounded  out  (in  consequence,  for 
example,  of  the  fact  that  the  mouths  of  its  streams  lie  in  foreign 
countries)  is  not  in  a  position  to  apply  with  full  success — if  at  all 
— the  principle  of  protection.  A  nation  so  situated  must  seek  first 
of  all  to  remedy  such  defects,  either  through  conquest  or  through 
treaty  arrangements. 

Manufacturing  ability  embraces  so  many  different  branches  of 
knowledge  and  endeavor,  and  presupposes  so  much  experience  and 
practice,  that  the  industrial  training  of  a  nation  necessarily  presents 
a  very  gradual  process.  Hasty  and  overzealous  application  of  the 
principle  of  protection  avenges  itself  through  the  diminution  of  the 
well-being  of  the  nation  in  question. 

Most  objectionable  and  injurious  of  all  is  the  sudden  and  com- 
plete isolation  of  the  nation  through  prohibitory  duties.  But  even 
such  measures  are  justifiable  in  case  the  nation,  in  the  course  of  a 
protracted  war,  has  been  cut  off  from  communication  with  other 
countries,  and,  in  the  face  of  an  involuntary  prohibition  upon  the 
manufactured  products  of  foreign  nations,  has  been  absolutely  com- 
pelled to  satisfy  its  own  needs. 

In  such  a  case  a  gradual  transition  should  be  effected  from  the 
system  of  embargoes  to  that  of  protection,  by  means  of  gradually 
diminishing  tariff  rates,  determined  considerably  in  advance  of  the 
date  on  which  they  shall  become  effective.  On  the  other  hand,  a 
nation  intent  on  abandoning  free  trade  in  favor  of  a  protective  sys- 
tem should  start  with  a  low  tariff  schedule,  gradually  supplanted, 
in  accordance  with  a  predetermined  scale,  by  higher  rates. 

The  tariff  rates  thus  predetermined  should  be  scrupulously  en- 
forced by  executive  authority.  While  the  government  is  not  author- 
ized to  reduce  these  rates  before  the  appointed  time,  it  may  increase 
them,  in  case  they  do  not  appear  adequate. 


2  84  LIST 

An  excessively  high  scale  of  import  duties,  such  as  serve  to  exclude 
foreign  competition  altogether,  is  a  detriment  to  the  nation  itself 
which  has  established  this  scale,  as  the  cessation  of  competition  with 
foreign  manufacturers  tends  to  create  a  state  of  lethargy  on  the  part 
of  the  home-manufacturers. 

In  case,  under  the  influence  of  fairly  high  and  gradually  increasing 
tariff  rates,  domestic  manufactures  fail  to  thrive,  it  is  evident  that 
the  nation  has  not  yet  acquired  the  necessary  resources  for  estab- 
lishing itself  in  a  dominant  position  in  the  field  of  manufactures. 

The  tariff  whereby  an  industry  has  once  been  protected  should 
never  be  reduced  to  a  point  at  which  the  existence  of  this  industry 
is  endangered  by  foreign  competition.  The  preservation  of  what  has 
been  achieved,  the  protection,  in  all  its  'essentials,  of  the  national 
industry,  must  constitute  an  inviolable  principle. 

Foreign  competition  may  accordingly  be  admitted  to  only  a  share 
of  the  increase  in  annual  consumption.  The  tariff  rates  must  be 
increased  as  soon  as  foreign  competition  has  appropriated  the  whole 
or  the  greater  part  of  the  annual  increase. 

A  nation  such  as  England,  which  has  gained  a  great  advantage 
over  all  the  other  nations  in  the  field  of  manufactures,  best  maintains 
and  extends  its  supremacy  as  a  manufacturing  and  trading  power 
by  means  of  the  largest  possible  measure  of  free  trade.  In  its  case 
the  cosmopolitan  and  the  political  principle  represent  one  and  the 
same  thing. 

This  explains  the  preference  of  enlightened  English  political 
economists  for  absolute  freedom  of  trade,  as  well  as  the  disinclina- 
tion of  prudent  economists  of  other  countries  to  apply  this  principle 
in  the  face  of  existing  world-conditions. 

For  a  quarter  of  a  century  the  English  system  of  embargoes  and 
protection  has  operated  to  her  own  disadvantage  and  to  the  advan- 
tage of  the  other  nations  striving  to  gain  the  ascendancy. 

Most  serious  of  all,  in  its  effect  upon  England,  is  her  own  prohi- 
bition upon  the  importation  of  foreign  raw  materials  and  foodstuffs. 

Commercial  associations  and  trade  agreements  are  the  most  effec- 
tive means  of  facilitating  intercourse  between  different  nations. 

Commercial  treaties,  however,  are  legitimate  and  enduring  only 
when  the  advantages  which  they  represent  are  reciprocal.  Inju- 
rious and  unwarrantable  are  such  trade  agreements  as  those  which. 


I 

NATIONAL  SYSTEM  OF  POLITICAL  ECONOMY     285 

owing  to  the  desire  of  a  nation  to  secure  concessions  for  the  exporta- 
tion of  agricultural  products,  sacrifice  in  the  interest  of  another 
nation  manufacturing  resources  which  are  already  in  course  of 
development ;  namely,  Methuen  compacts  and  those  whereby  one 
party  secures  the  lion's  share  of  the  benefits  conferred. 

An  illustration  of  such  one-sided  trade  agreements  is  to  be  found 
in  the  treaty  negotiated  between  England  and  France  in  1786.  All 
the  proposals  which  England  has  subsequently  made  to  France  and 
other  countries  are  of  the  same  character. 

While  protective  tariffs  may  temporarily  increase  the  price  of 
domestic  manufactures,  they  subsequently  lower  prices,  owing  to  the 
operation  of  domestic  competition ;  for  a  fully  developed  indus- 
try is  able  to  reduce  the  price  of  its  products  by  an  amount  equal 
to  the  costs  and  profits  involved  in  the  exportation  of  raw  materials 
and  foodstuffs  and  the  importation  of  manufactured  articles. 

The  loss  which  a  nation  undergoes  in  consequence  of  protective 
tariffs  consists  in  any  case  only  in  values ;  whereas,  on  the  other 
hand,  it  gains  powers  whereby  it  is  enabled  permanently  to  produce 
values  which  are  incalculable  in  their  amount.  This  expenditure  of 
values  is,  accordingly,  to  be  regarded  simply  as  the  price  of  the 
industrial  development  of  the  nation. 

The  protective  tariff  on  manufactures  does  not  have  to  be  borne 
by  the  agriculturists  of  the  nation  in  question.  The  development  of 
domestic  manufactures  serves  enormously  to  increase  wealth  and 
population  and,  consequently,  the  demand  for  agricultural  products, 
thus  augmenting  the  exchange-value  of  landed  property  and  the 
income  derived  therefrom ;  and  in  course  of  time,  moreover,  the 
demands  of  the  agricultural  population  for  manufactured  commod- 
ities are  supplied  more  cheaply.  The  profits  thus  obtained  exceed 
tenfold  the  losses  incurred  by  agriculturists  in  consequence  of  the 
temporary  increase  in  the  price  of  manufactures. 

In  like  manner  does  the  protective  system  conduce  to  the  advan- 
tage of  foreign  and  domestic  trade ;  for  it  is  only  in  the  case  of 
nations  which  themselves  supply  the  need  of  the  domestic  market 
for  manufactured  products,  consuming  their  own  agricultural  prod- 
ucts, and  exchanging  their  own  surplus  manufactures  for  foreign  raw 
materials  and  foodstuffs,  that  domestic  and  foreign  trade  constitute 
a  factor  of  importance.    Among  purely  agricultural  nations  in  the 


2  86  LIST 

• 

temperate  zone  these  two  activities  are  of  little  consequence,  the  for- 
eign trade  of  such  nations  being  monopolized,  as  a  rule,  by  the 
manufacturing  and  trading  nations  with  which  they  have  established 
relations. 

An  adequate  protective  system  does  not  grant  a  monopoly  to 
domestic  manufacturers,  serving  merely  to  guarantee  against  loss 
those  individuals  who  are  devoting  their  capital,  ability,  and  energy 
to  the  development  of  new  and  unfamiliar  industries. 

It  grants  no  monopoly  because  foreign  competition  gives  place 
merely  to  domestic  competition,  and  because  every  citizen  has  the 
privilege  of  availing  himself  of  the  prizes  offered  by  the  nation  to 
its  individuals. 

It  yields  a  monopoly  merely  to  the  citizens  of  the  nation  in 
question,  in  contradistinction  to  those  of  other  nations,  who  possess 
a  like  monopoly  in  their  own  respective  countries. 

This  monopoly  is  of  advantage,  as  it  not  only  serves  to  stimulate 
the  application  of  productive  forces  hitherto  merely  latent  and 
potential,  but  also  attracts  foreign  productive  forces  (capital  both 
material  and  intellectual,  entrepreneurs,  technicians,  and  operatives). 

On  the  other  hand,  lack  of  development  of  its  own  manufacturing 
resources  on  the  part  of  any  nation  possessing  a  civilization  of  long 
standing,  and  whose  productive  powers  can  no  longer  be  increased 
to  any  great  extent  by  means  of  the  exportation  of  raw  materials 
and  agricultural  products  and  by  the  importation  of  commodities  of 
foreign  manufacture,  exposes  this  nation  to  numerous  and  serious 
disadvantages. 

The  agriculture  of  such  a  land  must  necessarily  deteriorate ;  for 
the  increased  population  which,  in  connection  with  the  development 
of  domestic  manufactures  on  a  large  scale,  would  be  absorbed  by 
the  various  industries,  creating  a  large  demand  for  agricultural 
products,  and  thus  rendering  profitable  the  pursuit  of  agriculture 
on  a  large  scale,  must  now  devote  itself  exclusively  to  this  pursuit, 
thus  necessitating  the  parceling  out  of  land  and  the  conduct  of 
agriculture  on  a  small  scale,  and  seriously  impairing  the  wealth, 
power,  and  civilization  of  the  nation  in  question. 

An  agricultural  people  consisting  for  the  most  part  of  petty  peasants 
is  able  neither  to  supply  large  quantities  of  products  for  purposes 
of  domestic  trade,  nor  to  create  a  large  demand   for  articles  of 


NATIONAL  SYSTEM  OF  POLITICAL  ECONOMY     287 

manufacture.  In  these  circumstances,  every  individual  must  rely- 
largely  upon  his  own  resources  with  respect  both  to  production  and  to 
consumption.  Under  these  conditions  the  nation  can  never  develop 
a  complete  system  of  transportation,  and  can  thus  never  reap  the 
enormous  advantages  associated  with  the  possession  of  such  a  system. 

The  inevitable  consequence  of  such  a  situation  is  national  weak- 
ness— both  intellectual  and  material,  individual  and  political.  These 
effects  are  all  the  more  dangerous  in  case  adjacent  nations  have 
pursued  just  the  contrary  course,  advancing  at  every  point  where  we 
are  undergoing  retrogression,  the  courage,  energy,  and  spirit  of 
enterprise  of  their  citizens  being  heightened  by  the  prospect  of  a 
brighter  future,  while  we,  on  the  other  hand,  experience  ever  greater 
apathy  and  dejection  in  the  face  of  a  future  which  has  naught  to 
offer. 

History  offers  instances  of  the  decline  of  entire  nations  in  conse- 
quence of  their  inability  to  solve,  at  the  crucial  moment,  the  weighty 
problem  of  assuring,  through  the  establishment  of  manufactures  of 
their  own  and  the  creation  of  a  vigorous  industrial  and  commercial 
class,  their  intellectual,  economic,  and  political  independence. 


LIST :  THE  NATIONAL  DISTRIBUTION  OF  BUSINESS 

OPERATIONS  AND  THE  UNION  OF  THE  NATIONAL 

PRODUCTIVE  FORCES^ 

While  the  School^  owes  to  its  distinguished  founder  the  discovery 
of  that  natural  law  that  it  has  designated  as  division  of  labor, 
yet  neither  Adam  Smith  nor  any  of  his  followers  has  thoroughly 
examined  the  nature  of  this  law  and  traced  its  most  important 
consequences. 

The  very  expression  "division  of  labor"  is  inadequate,  producing 
necessarily  a  false  or  at  least  an  inadequate  conception. 

Division  of  labor  occurs  when  a  savage,  in  the  course  of  one  and 
the  same  day,  goes  hunting  or  fishing,  fells  trees,  repairs  his 
wigwam,   makes   arrows,    nets,   and   clothes ;    but   we   are   likewise 

iList,  National  System,  chap,  xiii  (Vol.  I,  pp.  239-254,  of  Jena  edition,  1910). 
2 By  "the  School,"  List  means  the  school  of  Adam  Smith  and  his  followers, 
completely  dominant  at  his  time  in  British  thought.  (Ed.) 


2  88  LIST 

confronted  with  division  of  labor  when,  in  accordance  with  Adam 
Smith's  illustration,  ten  different  persons  divide  among  themselves 
the  different  operations  involved  in  the  manufacture  of  a  pin. 
The  former  is  an  objective,  the  latter  a  subjective,  division  of  labor ; 
the  former  procedure  hinders  production,  the  latter  promotes  it.  The 
essential  difference  between  the  two  is  to  be  found  in  the  fact  that 
in  the  former  case  one  person  divides  his  work  for  the  purpose  of 
producing  different  objects,  while  in  the  latter  case  several  persons 
distribute  their  efforts  for  the  production  of  a  single  object. 

Both  operations  may,  on  the  other  hand,  with  equal  propriety  be 
characterized  as  a  union  of  labor :  the  savage  associates  different 
tasks  with  one  and  the  same  person,  while  in  the  manufacture  of 
pins  different  persons  unite  for  purposes  of  joint  production. 

The  essence  of  the  natural  law  in  terms  of  which  the  School 
explains  such  important  phenomena  of  social  economy  is  evidently 
not  merely  a  division  of  labor,  but  a  distribution  of  different  manu- 
facturing operations  among  several  individuals,  and  at  the  same 
time  an  association  or  union  of  different  activities,  views,  and  forces 
for  the  purpose  of  joint  production.  The  reason  for  the  productivity 
of  these  operations  is  to  be  found  not  merely  in  the  division  resorted 
to,  but,  rather,  essentially  in  the  association.  Adam  Smith  himself  no 
doubt  perceives  this  distinction  when  he  says:  "The  necessaries  of 
life  of  the  lowest  members  of  society  are  a  product  of  joint  labor 
and  of  the  cooperation  of  a  number  of  individuals."  What  a  pity 
that  he  did  not  pursue  this  idea — so  clearly  expressed — of  social 
labor ! 

If  we  pause  to  examine  the  illustration  of  the  pin  factory  given 
by  Adam  Smith  for  the  purpose  of  clarifying  the  advantages  of  the 
division  of  labor,  and  seek  the  ultimate  causes  of  the  fact  that  ten 
persons,  associated  in  the  factory,  can  produce  a  far  greater  number 
of  pins  than  if  each  individual  carried  on  the  entire  process  sep- 
arately, we  find  that  the  division  of  the  manufacturing  processes 
without  the  union  of  the  productive  forces  for  the  achievement  of  a 
joint  purpose  could  promote  production  to  only  a  slight  extent.  In 
order  that  such  a  result  may  be  attained,  the  different  individuals 
must  be  associated  both  intellectually  and  physically  and  must  work 
together.  The  one  who  makes  the  heads  of  the  pins  must  be  assured 
of  the  work  of  the  one  who  makes  the  points,  lest  he  run  the  risk 


UNION  OF  NATIONAL  PRODUCTIVE  FORCES      289 

of  manufacturing  pinheads  to  no  purpose.  The  performance  of 
each  must  stand  in  the  proper  relation  to  that  of  the  others ;  the 
workers  must  live  as  close  together  as  possible ;  their  cooperation 
must  be  assured.  Let  us  assume,  for  example,  that  each  of  these  ten 
workmen  lived  in  a  different  country :  how  frequently  their  coop- 
eration would  be  interfered  with  by  war,  transportation  difficulties, 
commercial  crises,  etc.!  How  much  more  expensive  would  be  the 
product,  and  how  greatly  would  the  advantages  of  division  of  labor 
be  reduced,  in  consequence!  And  would  not  the  withdrawal  or 
exclusion  of  a  single  member  of  this  association  block  the  activity 
of  all  the  other  members? 

The  School,  in  designating  solely  the  division  or  distribution  of 
operations  as  the  essence  of  the  natural  law  in  question,  made  the 
mistake  of  applying  it  merely  to  the  individual  factory  or  farm,  fail- 
ing to  see  that  the  same  law  extends  its  operation  to  the  whole  field 
of  manufactures  and  agriculture — to  the  entire  economy  of  the 
nation. 

Just  as  the  pin  factory  owes  its  success  solely  to  the  union  of  the 
productive  forces  of  the  individuals,  so  is  the  prosperity  of  every 
type  of  factory  dependent  upon  the  association  of  its  productive 
forces  with  those  of  all  other  kinds  of  factories  and  industries.  It 
is  requisite  to  the  success  of  a  machine  factory,  for  example,  that 
the  mines  and  the  metal  factories  supply  it  with  the  necessary  ma- 
terials and  that  all  of  the  hundred  different  kinds  of  factories  which 
require  machines  buy  its  products.  Without  machine  factories  a 
nation  would  run  the  risk  of  losing  in  time  of  war  the  greater  part 
of  its  manufacturing  resources. 

In  like  manner  the  entire  body  of  industry,  in  its  relations  to  the 
sum  total  of  agriculture,  and  the  latter  in  its  relations  to  the  former, 
thrive  best  the  more  closely  related  they  are  to  one  another,  and  the 
less  their  interaction  is  subjected  to  interruption.  The  advantages 
of  their  association  under  one  and  the  same  political  authority  in 
time  of  war,  strained  international  relations,  commercial  crises, 
failure  of  crops,  etc.,  are  no  less  evident  than  are  the  advantages  of 
the  union,  under  one  and  the  same  roof,  of  those  associated  with  a 
pin  factory. 

Smith  maintains  that  division  of  labor  is  not  applicable  to  agri- 
culture in  the  same  degree  as  to  factories :  he  had  in  mind  merely 


2  90  LIST 

the  individual  factory  and  the  individual  estate.  He  failed  to  extend 
the  application  of  his  principle  to  entire  regions  and  provinces.  No- 
where do  the  distribution  of  operations  connected  with  an  enterprise 
and  the  union  of  productive  forces  exert  a  greater  influence  than 
where  each  region  and  each  province  is  in  a  position  to  devote  itself, 
exclusively  or  at  least  principally,  to  those  branches  of  agricultural 
production  to  which  it  is  best  adapted  by  nature.  In  one  region 
grain  and  hops  have  the  preference ;  in  another,  wine  and  fruit ;  in 
a  third,  wood  and  cattle-raising.  If  every  region  devotes  itself  to  all 
these  branches  of  production,  it  is  clear  that  soil  and  labor  can  by 
no  means  prove  so  productive  as  where  each  individual  region  con- 
cerns itself  chiefly  with  those  branches  of  production  with  respect 
to  which  it  is  particularly  favored  by  nature,  exchanging  the  surplus 
of  its  own  characteristic  products  for  the  surplus  of  those  provinces 
which  similarly  possess  a  peculiar  natural  advantage  but  with  refer- 
ence to  different  raw  materials  and  necessaries  of  life.  This  dis- 
tribution of  business  operations,  this  association  of  the  productive 
forces  employed  in  agriculture,  is  possible  only  in  a  country  which 
has  attained  to  the  highest  development  in  all  branches  of  factory 
industry.  For  it  is  only  in  a  country  so  situated  that  there  is  a 
large  demand  for  the  most  diversified  products  and  that  the  demand 
for  surplus  agricultural  produce  is  so  certain  and  so  considerable 
that  the  producer  may  be  sure  that  either  this  year  or  next  he  can 
dispose  of  all  his  surplus  at  reasonable  prices ;  it  is  only  under 
such  circumstances  that  large  amounts  of  capital  can  be  devoted 
to  speculation  in  domestic  produce  and  its  storage,  and  that  improve- 
ments of  transportation  systems,  such  as  canals  and  railroads,  steam- 
ship lines,  and  highways,  can  be  profitably  effected  on  a  large  scale. 
And  it  is  only  by  means  of  a  perfected  transportation  system  that 
every  region  or  province  is  enabled  to  share  with  all  the  other  prov- 
inces, even  the  most  remote,  the  surplus  quantities  of  its  charac- 
teristic products,  procuring  in  return  the  surplus  of  commodities 
peculiar  to  these  regions.  When  everyone  himself  produces  what  he 
needs,  there  is  scant  opportunity  for  exchange,  and  hence  no  need 
for  expensive  improvements  in   transportation. 

One  should  note  the  manner  in  which  the  increase  of  productive 
forces,  in  consequence  of  division  of  labor  and  association  of  indi- 
vidual   operatives^    commences   in    connection    with    the    individual 


UNION  OF  NATIONAL  PRODUCTIVE  FORCES  291 

factory,  progressing  until  it  assumes  the  proportions  of  a  national 
association :  the  factory  thrives  in  proportion  to  the  degree  of  dis- 
tribution of  the  processes  involved,  in  accordance  with  the  closeness 
of  association  on  the  part  of  the  workmen,  and  to  the  extent  to 
which  is  assured  the  cooperation  of  each  individual  and  each  part 
with  the  whole.  The  productive  power  of  each  individual  factory 
increases  proportionately  to  the  development  of  the  entire  body  of 
manufacturing  resources  of  the  country,  in  all  their  ramifications, 
and  to  the  degree  in  which  these  resources  are  bound  up  with  all 
other  branches  of  industry.  The  productivity  of  agriculture  pro- 
gresses in  proportion  to  the  closeness  with  which  it  is  associated, 
geographically,  commercially,  and  politically,  with  a  manufacturing 
system  highly  developed  in  all  its  branches.  The  measure  of  the 
development  of  the  manufacturing  resources  will  be  that  of  the 
progress  in  the  distribution  of  the  processes  or  operations  and  in 
the  union  of  the  productive  forces  of  agriculture,  whereby  the  latter 
is  raised  to  the  highest  plane  of  perfection.  The  nation  which 
possesses  the  greatest  productive  power  and  hence  the  greatest 
wealth  will  accordingly  be  that  which,  within  its  own  territory,  has 
brought  its  manufacturing  resources  in  all  their  ramifications  to  the 
highest  degree  of  perfection,  and  whose  territory  and  agricultural 
production  are  large  enough  to  provide  its  factory  population 
with  the  greater  part  of  the  provisions  and  raw  materials  which 
it  requires. 

Let  us  consider  the  converse  of  this  argument.  A  nation  which 
possesses  only  agriculture  and  the  scantiest  and  most  indispensable 
industries  lacks  the  primary  and  most  important  distribution  of 
productive  operations  among  its  citizens,  and  hence  the  most  impor- 
tant half  of  its  productive  resources ;  in  fact,  it  lacks  even  an  advan- 
tageous distribution  of  operations  in  the  individual  branches  of 
agriculture.  A  nation  so  imperfectly  developed  will  not  only  not  be 
half  so  productive  as  one  fully  developed ;  but,  assuming  a  territory 
equally  large  or  much  larger  and  an  equal  or  much  greater  popula- 
tion, its  productive  power  will  perhaps  be  able  to  create  scarcely 
one  fifth,  perhaps  scarcely  one  tenth,  of  the  material  wealth  which 
a  fully  developed  nation  can  create.  The  reason  is  the  same  as  that 
which  explains  why,  in  a  highly  complicated  factory,  ten  persons 
produce  not  merely  ten  times  but  perhaps  thirty  times  as  much  as 


2  92  LIST 

a  single  individual,  and  why  a  man  with  one  arm  finds  his  capacity 
for  work  reduced  by  not  simply  one  half  but  by  an  enormous  amount, 
as  compared  with  the  work  which  can  be  accomplished  by  a  man 
with  two  arms.  This  loss  of  productive  capacity  will  be  all  the 
greater  in  proportion  to  the  greater  possibilities  of  promoting  the 
work  of  the  factory  by  the  use  of  machines,  and  the  fewer  oppor- 
tunities for  applying  machinery  to  agricultural  purposes.  A  portion 
of  the  productive  energy  which  the  agricultural  nation  thus  loses 
will  accrue  to  that  nation  which  exchanges  its  manufactures  in  return 
for  agricultural  products.  But  this  constitutes  a  positive  loss  only 
in  case  the  agricultural  nation  has  already  reached  the  stage  of 
civilization  and  of  political  development  requisite  for  the  develop- 
ment of  manufacturing  resources.  But  if  it  has  not  yet  reached  this 
stage ;  if  its  status  is  still  that  of  a  barbarous  or  half-civilized  people  ; 
if  its  productive  power  in  the  field  of  agriculture  is  still  in  the  most 
primitive  stage ;  if  it  is  still  possible  for  the  importation  of  foreign 
manufactures  and  the  exportation  of  raw  products  markedly  to 
increase  its  prosperity  from  year  to  year,  and  to  stimulate  and 
develop  its  intellectual  and  social  forces ;  if  this  traffic  is  not  inter- 
fered with  by  foreign  prohibitions  upon  the  importation  of  raw 
materials  or  by  war,  or  if  the  territory  of  the  agricultural  nation  is 
situated  in  the  torrid  zone; — under  these  circumstances  the  advan- 
tage will  be  equally  great  and  natural  for  both  sides,  since,  under 
the  influence  of  such  an  exchange  of  domestic  products  for  articles 
of  foreign  manufacture,  a  nation  so  situated  advances  with  infinitely 
greater  speed  and  safety  in  the  direction  of  civilization  and  the 
development  of  its  productive  powers  in  general  than  if  it  had  to 
depend  for  its  development  wholly  upon  itself.  On  the  other  hand, 
if  the  agricultural  nation  has  already  attained  the  culmination  of 
its  agricultural  development — in  so  far  as  this  can  be  achieved 
through  the  influence  of  foreign  trade — or  if  the  manufacturing 
nation  refuses  to  accept  the  products  of  the  agrarian  nation  as  pay- 
ment for  its  manufactures,  and  if  at  the  same  time,  owing  to 
successful  competition  on  the  part  of  the  manufacturing  nations  in 
the  markets  of  the  agricultural  nation,  it  is  impossible  for  the  latter 
successfully  to  establish  factories  of  its  own,  then  the  productive 
forces  in  the  field  of  agriculture  in  question  are  threatened  with 
paralysis. 


UNION  OF  NATIONAL  PRODUCTIVE  FORCES      293 

The  term  arrested  agriculture  may  be  applied  to  a  condition  in 
which,  owing  to  the  lack  of  efficient  or  gradually  developing  manu- 
facturing resources,  the  entire  increase  in  population  devotes  itself 
to  agriculture,  consumes  the  surplus  quantities  of  agricultural  prod- 
ucts, and,  as  soon  as  the  age  of  maturity  has  been  reached,  either 
emigrates  or  else  distributes  among  itself  and  the  landowners  already 
established  the  available  landholdings,  until  the  holdings  of  each 
family  have  become  so  small  that  a  family  is  able  to  produce  only 
the  scantiest  quantities  of  foodstuffs  and  raw  materials,  such  as  are 
necessary  to  supply  its  own  needs,  being  unable  to  create  any  con- 
siderable surplus  such  as  it  might  dispose  of  in  return  for  the  neces- 
sary articles  of  manufacture.  Where  there  is  a  normal  development 
of  the  productive  forces  the  greater  part  of  the  increase  in  the 
agrarian  population  should  be  transferred,  as  soon  as  the  nation  has 
attained  a  certain  degree  of  development,  to  the  factories ;  and 
surplus  agricultural  products  should  serve,  partly  to  supply  the 
factory  population  with  means  of  subsistence  and  with  raw  materials, 
and  partly  to  provide  the  landowners  with  the  manufactured  articles, 
machines,  and  utensils  necessary  for  their  consumption  and  for 
increasing  their  production. 

If  this  relation  has  been  established  at  the  proper  stage,  the 
productive  forces  of  agriculture  and  industry  exactly  balance  each 
other,  and  do  so  indefinitely :  the  demand  for  agricultural  products 
on  the  part  of  the  industrial  population  becomes  so  large  that  the 
number  of  farm-laborers  and  the  parceling-out  of  the  available  land 
will  exactly  fit  the  exigencies  of  producing  the  maximum  surplus. 
The  amount  of  this  surplus  will  determine  the  quantity  of  manufac- 
tured products  which  the  agrarian  population  will  be  able  to  con- 
sume. A  progressive  increase  in  the  surplus  of  agricultural  products 
will  result  in  a  constantly  increasing  demand  for  factory  operatives. 
The  surplus  agricultural  population  will,  accordingly,  find  continuous 
opportunity  for  work  in  the  factories,  and  the  manufacturing  popu- 
lation will  finally  not  only  equal  but  far  exceed  the  farming  popula- 
tion. The  latter  case  is  that  of  England  ;  the  former,  that  of  a  part  of 
France  and  Germany.  England  was  led,  chiefly  in  consequence  of 
the  sheep  farms  and  woolen  mills  which  were  established  there  on  a 
large  scale  much  earlier  than  in  other  countries,  to  effect  this 
normal  distribution  of  productive  operations  between  the  two  chief 


294  LIST 

branches  of  the  industry.  In  other  countries  agriculture  declined, 
chiefly  in  consequence  of  the  influence  of  feudalism  and  the  rule  of 
armed  force.  The  possession  of  landed  property  served  only  to 
create  prestige  and  authority,  in  so  far  as  it  became  possible  thereby 
to  support  the  vassals  required  by  the  feudal  lord  for  his  private 
warfare.  The  more  vassals  he  possessed,  the  greater  the  number  of 
v/arriors  at  his  disposal.  Besides,  the  crudeness  of  the  age  made  it 
impossible  for  the  lord  of  the  manor  to  utilize  his  income  in  any 
other  form  than  in  the  maintenance  of  a  large  number  of  retainers ; 
and  he  knew  no  better  way  to  pay  these  vassals  and  to  attach  them 
to  his  person  than  to  give  them  a  piece  of  land  to  cultivate,  in  return 
for  the  pledge  of  personal  service  and  a  small  payment  of  tribute  in 
kind.  In  this  way  was  laid,  in  artificial  fashion,  the  foundation  for 
the  excessive  parceling-out  of  land ;  and  if  now  an  effort  is  being 
made,  by  the  exercise  of  executive  power,  again  to  alter  this  situa- 
tion by  artificial  methods,  the  government  is  simply  restoring  the 
original  status. 

The  only  way  to  check  the  progressive  deterioration  of  a  nation's 
agricultural  resources  and,  so  far  as  it  has  been  occasioned  by  the 
nature  of  earlier  institutions,  gradually  to  remedy  the  situation  in 
question  is — apart  from  the  fostering  of  emigration — the  creation 
of  domestic  manufacturing  resources,  whereby  the  increase  in  popu- 
lation is  gradually  attracted  to  the  factories  and  a  greater  demand 
is  created  for  agricultural  products,  and  the  cultivation  of  larger 
farms  is  hence  made  more  profitable,  the  farmer  being  encouraged 
to  extract  from  his  land  as  large  a  surplus  product  as  possible. 

The  degree  of  productive  power  exercised  by  the  agriculturist  and 
the  laborer  engaged  in  farming  will  always  be  dependent  upon  the 
ease  or  difficulty  with  which  is  effected  the  exchange  of  agricultural 
products  for  articles  of  manufacture  and  for  miscellaneous  products. 
We  have  demonstrated  elsewhere,  by  citing  the  example  of  England, 
that  foreign  trade  may  be  of  great  advantage  in  this  respect,  in  the 
case  of  a  nation  on  a  low  plane  of  development.  But  a  nation  which 
is  already  well  advanced  in  respect  to  civilization,  amount  of  avail- 
able capital,  and  population  will  find  that  the  possession  of  manu- 
facturing resources  of  its  own  is  infinitely  more  advantageous  in  its 
effect  upon  agriculture  than  is  the  most  prosperous  foreign  trade 
in  the  absence  of  manufactures.     This  is  because  such  resources 


UNION  OF  NATIONAL  PRODUCTIVE  FORCES      295 

guarantee  it  against  all  the  fluctuations  due  to  war  or  foreign  trade- 
prohibitions  and  commercial  crises ;  because  it  saves  the  greater 
part  of  the  costs  of  transportation  and  the  trading  profits  associated 
with  the  shipment  of  its  products  and  the  importation  of  manu- 
factured articles ;  because  it  derives  the  greatest  benefit  from  the 
improvements  in  transportation  stimulated  by  the  needs  of  manu- 
facturing industry,  and  in  connection  with  which  a  group  of  hitherto 
latent  personal  and  natural  forces  is  developed ;  and  because,  in 
general,  the  interaction  of  manufacturing  and  agricultural  forces 
increases  in  proportion  to  the  closeness  of  the  relations  obtaining 
between  agriculturist  and  manufacturer  and  to  their  freedom  from 
obstacles  of  any  sort  whereby  they  are  hampered  in  the  exchange  of 
their  various  products. 

In  my  letters  to  Mr.  Charles  J.  Ingersoll,  President  of  the  Penn- 
sylvania Society  for  the  Promotion  of  Manufactures  and  the  Me- 
chanic Arts,  written  in  1828  (Outlines  of  a  New  System  of  Political 
Economy),  I  sought  to  elucidate  in  the  following  manner  the  advan- 
tages of  uniting,  in  one  and  the  same  country,  under  one  and  the 
same  political  rule,  the  resources  of  manufacturing  and  agriculture : 
"Suppose  that  you  did  not  understand  the  art  of  grinding  corn — 
something  certainly  considered  a  great  art  in  its  day ;  suppose, 
further,  you  were  unfamiliar  with  the  art  of  baking  bread,  just  as, 
according  to  Anderson,  the  genuine  art  of  salting  herrings  had  not 
yet  been  discovered  by  the  British  as  late  as  the  seventeenth  cen- 
tury ;  suppose,  accordingly,  that  you  had  to  send  your  grain  to 
England,  there  to  have  it  transformed  into  meal  and  bread :  how 
much  of  this  grain  would  be  retained  by  the  English  as  compensation 
for  the  work  of  grinding  and  baking?  How  much  of  it  would  be 
consumed  by  the  draymen,  the  sailors,  and  the  merchants  concerned 
with  exporting  the  grain  and  importing  the  bread?  How  much 
would  return  to  the  hands  of  those  who  had  planted  it?  There  is 
no  question  that  foreign  trade  would  play  an  important  role  in 
this  connection,  but  it  is  very  doubtful  whether  this  trade  would  be 
very  conducive  to  the  welfare  and  independence  of  the  nation. 
Consider  for  a  moment  what  would  be  the  position,  in  case  of  war 
between  this  country  (North  America)  and  Great  Britain,  of  those 
who  produce  grain  for  English  mills  and  bakeries,  and  what  would 
be  the  situation  of  those  who  consume  English  bread.    But  just  as 


296  LIST 

the  economic  well-being  of  the  farmer  who  raises  grain  requires  that 
the  miller  who  grinds  it  shall  live  in  his  vicinity,  in  the  same  way  the 
welfare  of  the  agriculturist  in  general  demands  that  the  manu- 
facturer shall  be  readily  accessible,  that  of  a  rural  district  requires 
the  presence  of  a  prosperous  industrial  city  in  its  midst,  and  that 
of  the  entire  body  of  the  agriculture  of  a  country  demands  that  the 
domestic  manufacturing  resources  should  be  developed  to  the  maxi- 
mum of  their  capacity." 

Let  us  compare  the  status  of  agriculture  in  the  vicinity  of  a  popu- 
lous city  with  its  condition  in  remote  provinces.  In  the  latter  case 
the  farmer  can  raise,  for  sale,  only  those  crops  which  can  stand  the 
strain  of  transportation  to  distant  points,  and  which  cannot  be 
supplied  by  regions  less  remote,  at  lower  prices,  and  in  better  quali- 
ties. A  large  part  of  his  profit  is  absorbed  by  the  costs  of  trans- 
portation. It  is  difficult  for  him  to  secure  the  capital  which  could  be 
so  profitably  devoted  to  the  development  of  his  farm.  Owing  to  the 
lack  of  stimulating  examples  and  of  means  of  instruction,  new 
methods  of  procedure,  better  implements,  and  new  methods  of  culti- 
vation will  be  introduced  only  with  difficulty.  The  laborers  them- 
selves, owing  to  bad  example  and  to  the  absence  of  the  stimuli 
necessary  for  the  proper  exertion  and  emulation,  will  not  develop 
their  productive  powers  to  any  extent  and  will  become  slaves  to 
routine  and  slothfulness. 

The  agriculturist  who  lives  in  the  vicinity  of  a  city,  on  the  other 
hand,  is  in  a  position  to  devote  every  bit  of  land  to  the  type  of  culti- 
vation for  which  the  soil  is  best  adapted.  He  can  produce  the  great- 
est variety  of  things  to  good  advantage.  Garden  truck,  poultry, 
eggs,  milk  and  butter,  fruit,  and  commodities  which  the  more  re- 
motely situated  farmer  regards  as  insignificant  accessories  will  yield 
him  a  handsome  profit.  While  the  former  must  confine  himself 
merely  to  cattle-raising,  the  latter  will  derive  much  greater  profit 
from  the  fattening  of  animals,  and  will  be  hence  impelled  to  perfect 
the  cultivation  of  forage.  A  multitude  of  things  which  to  the  more 
remote  agriculturist  appear  to  be  of  little  or  no  value — for  example, 
stone,  sand,  water-power,  etc. — he  will  be  able  to  turn  to  excellent 
account.  The  greatest  number  of  machines  and  implements,  of  the 
best  quality,  and  the  best  methods  of  instruction  are  at  his  disposal. 
He  finds  it  easy  to  obtain  the  capital  necessary  for  the  improvement 


UNION  OF  NATIONAL  PRODUCTIVE  FORCES      297 

of  his  farm.  Farm-owners  and  laborers,  owing  to  the  pleasures 
which  the  city  affords,  the  spirit  of  emulation  which  it  inculcates, 
and  the  ease  with  which  they  can  earn  a  living,  will  be  induced  to 
summon  up  all  their  mental  and  physical  powers  for  the  improve- 
ment of  their  condition.  Precisely  the  same  difference  obtains  be- 
tween a  nation  which  combines  agriculture  and  manufactures  in  the 
same  territory  and  a  nation  which  exchanges  its  own  agricultural 
produce  for  commodities  of  foreign  manufacture. 

The  whole  social  status  of  a  nation  in  general  may  be  judged  in 
accordance  with  the  principle  of  the  division  of  labor  and  the  asso- 
ciation of  productive  forces.  The  relation  of  the  pin  to  the  pin 
factory  is  paralleled  by  that  of  national  well-being  to  the  great 
association  called  the  nation.  The  most  important  division  of  occu- 
pations in  the  nation  is  that  of  the  intellectual  from  the  material 
ones.  Each  of  these  groups  limits  the  other.  The  greater  the  con- 
tribution of  the  intellectual  and  spiritual  producers  to  the  advance- 
ment of  morality,  the  religious  spirit,  enlightenment,  dissemination 
of  knowledge  and  freedom,  political  progress,  the  domestic  security 
of  person  and  property,  and  the  external  independence  and  power  of 
the  nation,  the  greater  will  be  the  volume  of  material  production ; 
while  the  greater  the  volume  of  production  of  material  goods,  the 
greater  will  be  the  capacity  for  the  production  of  intellectual  and 
spiritual  values. 

The  highest  manifestation  of  the  division  of  labor  and  of  the  asso- 
ciation of  the  productive  forces  in  connection  with  material  produc- 
tion is  represented  in  the  case  of  agriculture  and  manufactures. 
Both,  as  we  have  shown,  are  conditioned  reciprocally. 

As  in  the  case  of  the  pin  factory,  so  in  the  case  of  the  nation, 
the  productivity  of  each  individual,  each  separate  branch  of 
production,  and,  finally,  of  the  whole  social  structure  requires  that 
the  activity  of  every  individual  stand  in  the  right  relation  to  the 
activity  of  every  other  individual.  This  relation  is  designated  as  the 
balance  or  harmony  of  the  productive  forces.  A  nation  may  possess 
too  many  philosophers,  philologists,  and  men  of  letters,  and  a  defi- 
cient number  of  technicians,  merchants,  and  mariners.  This  results 
from  highly  developed  literary  or  academic  culture,  not  supported 
by  a  corresponding  development  of  manufacturing  resources  nor 
by  extensive  domestic  and  foreign  trade :   the  situation  is  parallel 


298  LIST 

to  that  of  a  pin  factory  in  which  the  number  of  pinheads  manu- 
factured should  far  exceed  that  of  the  points.  The  superfluous  pin- 
heads  in  such  a  nation  are  represented  by  a  mass  of  useless  books, 
subtle  systems,  and  learned  bickerings,  which  serve  more  to  becloud 
than  to  cultivate  the  mind  of  the  nation,  diverting  the  latter  from 
useful  occupations  and  hampering  the  development  of  the  productive 
powers  of  the  nation  in  almost  the  same  way  as  if  it  possessed  too 
many  priests  and  too  few  teachers  for  the  instruction  of  its  youth, 
too  many  soldiers  and  too  few  statesmen,  an  excessive  number  of 
administrators  and  a  dearth  of  judges  and  legal  counselors. 

A  nation  which  pursues  merely  agriculture  is  akin  to  an  individual 
who  is  hampered  in  the  work  of  material  production  by  the  loss  of 
an  arm.  Trade  is  merely  an  intermediary  in  the  service  of  agri- 
cultural and  manufacturing  resources  and  their  separate  branches. 
A  nation  which  exchanges  agricultural  products  for  commodities  of 
foreign  manufacture  may  be  compared  to  an  individual  with  one 
arm  who  depends  upon  the  assistance  lent  by  the  arm  of  a  stranger. 
This  support  is  of  service  to  the  nation  but  is  not  so  advantageous 
as  would  be  the  possession  of  two  arms  of  its  own — if  for  no  other 
reason  because  its  activity  is  dependent  upon  the  caprice  of  another. 
If  it  possesses  its  own  manufacturing  resources  it  can  produce  an 
amount  of  necessaries  of  life  and  raw  materials  equivalent  to  what 
is  consumed  by  its  own  .manufactures  and  industrial  population; 
but  if  it  is  dependent  upon  foreign  manufactures,  it  can  produce  only 
such  surplus  quantities  as  foreign  countries  are  unable  to  produce 
themselves  and  as  they  are  obliged  to  purchase  abroad. 

The  relation  of  division  of  labor  and  association  of  productive 
forces  among  the  different  nations  of  the  earth  is  precisely  the  same 
as  that  which  obtains  among  the  different  regions  of  one  and  the 
same  country.  In  the  former  case  this  adjustment  is  effected  by 
means  of  international  trade ;  in  the  latter  case,  by  means  of  domes- 
tic or  national  trade.  The  international  association  of  productive 
forces  is,  however,  very  imperfect,  inasmuch  as  it  is  subjected  to 
frequent  interruption  in  consequence  of  war,  political  measures, 
commercial  crises,  etc.  Although  this  relation  represents  the  high- 
est manifestation  of  the  phenomenon  in  question,  inasmuch  as  it 
serves  to  bring  together  the  different  nations  of  the  earth,  it  is, 
however,  from  the  standpoint  of  the  well-being  of  individual  nations 


UNION  OF  NATIONAL  PRODUCTIVE  FORCES      299 

on  a  high  plane  of  civiHzation,  the  least  important  factor — a  fact 
which  is  academically  recognized  by  the  proposition  that  the  domes- 
tic market  of  a  nation  is  incomparably  more  important  than  the 
foreign  market.  From  this  fact  may  be  deduced  the  proposition 
that  it  is  to  the  interest  of  every  great  nation  to  concentrate  its 
efforts  upon  the  national  union  of  its  productive  powers,  subordi- 
nating to  this  endeavor  the  quest  for  international  association. 

International  as  well  as  national  division  of  labor  is  largely  deter- 
mined by  the  climate  and  by  nature  in  general.  It  is  not  possible 
in  every  country  to  produce  tea,  as  in  China,  spices,  as  in  Java, 
cotton,  as  in  Louisiana,  or  grain,  wool,  fruit,  and  articles  of  manufac- 
ture, as  in  the  countries  of  the  temperate  zone.  It  would  be  folly 
for  a  nation  to  attempt  to  obtain  by  means  of  national  division  of 
labor,  i.  e.,  by  means  of  domestic  production,  commodities  to  the 
production  of  which  it  is  not  adapted  by  nature  and  which  it  can 
obtain  more  cheaply  and  to  better  advantage  by  means  of  interna- 
tional division  of  labor,  i.e.,  through  foreign  trade;  just  as  it  would 
be  indicative  of  deficient  national  civilization  or  enterprise  for  a 
nation  to  fail  to  utilize  all  its  available  natural  resources  for  the 
purpose  of  satisfying  its  domestic  needs  and,  by  means  of  a  surplus 
of  products,  of  obtaining  those  essential  commodities  to  the  produc- 
tion of  which  its  own  territory  is  not  adapted  by  nature. 

Those  countries  which  are  most  favored  by  nature  with  respect 
to  national  and  international  division  of  labor  are  evidently  those 
whose  soil  produces  the  best  quality  and  the  largest  quantity  of  the 
commonest  necessaries  of  life  and  whose  climate  is  most  conducive 
to  physical  and  mental  exertion — namely,  the  countries  of  the  tem- 
perate zone.  For  it  is  these  countries  which  are  best  adapted  to 
the  development  of  manufacturing  resources,  by  means  of  which  a 
nation  is  able  not  only  to  attain  the  highest  degree  of  intellectual  and 
social  development  and  political  power  but  also  to  compel  the 
countries  of  the  torrid  zone  and  the  nations  which  are  on  a  lower 
plane  of  civilization  in  a  certain  sense  to  pay  it  tribute.  It  is, 
accordingly,  the  countries  of  the  temperate  zone  which,  above  all 
others,  are  summoned  to  the  task  of  bringing  the  national  division 
of  labor  to  its  highest  point  of  perfection  and  of  utilizing  the  inter- 
national division  of  labor  for  the  purpose  of  enriching  themselves. 


XI 

BASTIAT:  ECONOMIC  SOPHISMS^ 

3j%  Jj*  5|C  5|^  ^^  ^1^  S^  ^|C  J|C  2|C  3|C 

IV.    Equalizing  the  Conditions  of  Production 

IT  IS  said — but  in  order  not  to  be  accused  of  putting  sophisms 
into  the  mouths  of  the  protectionists,  I  cite  the  words  of  one  of 
their  most  vigorous  champions. 

"It  has  been  thought  that  protection  in  our  case  should  simply 
represent  the  difference  existing  between  the  cost  price  of  a  commod- 
ity produced  by  us  and  the  cost  price  of  a  similar  commodity  pro- 
duced by  our  neighbors.  ...  A  protective  duty  reckoned  upon  such 
foundations  would  secure  only  free  competition  .  .  . ;  free  competi- 
tion obtains  only  where  there  is  equality  of  conditions  and  expenses. 
When  a  horse-race  is  in  question,  the  load  that  each  racer  is  to  carry 
is  weighed,  and  conditions  are  equalized ;  otherwise  they  would  not 
be  competitors.  When  commerce  is  in  question,  if  one  of  the  vendors 
can  furnish  his  wares  at  a  lower  price  he  ceases  to  be  a  competitor 
and  becomes  a  monopolist.  .  .  .  Cut  off  that  protection  which  rep- 
resents the  difference  in  the  cost  price  and  the  foreigner  invades 
your  market  and  acquires  a  monopoly. "- 

"Everyone  ought  to  wish  for  himself,  as  well  as  for  others,  that 
the  production  of  his  country  should  be  protected  against  foreign 
competition,  whenever  the  latter  is  able  to  furnish  the  products  at  a 
lower  price." ^ 

This  argument  recurs  incessantly  in  the  writing  of  the  protec- 
tionist school.  I  propose  to  examine  it  with  care  — that  is  to  say 
that  I  entreat  the  attention  and  even  the  patience  of  the  reader. 
I  shall  consider  first  the  inequalities  inherent  by  nature,  then  those 
consequent  upon  the  diversity  of  the  imposts. 

1  Frederic   Bastiat    (1801-1850),   Sophismes  Economiques,   ist  series    (1847) 
(pp.  23-53,  of  Brussels  edition,  1851). 
^Viscount  de  Romanet. 
^Mathicu  de  Dombaslc. 

300 


ECONOMIC  SOPHISMS  301 

Here,  as  elsewhere,  we  again  find  the  theorists  of  protection  as- 
suming the  point  of  view  of  the  protector,  while  we  enter  the  lists 
on  behalf  of  those  unhappy  consumers  of  whom  they  absolutely 
refuse  to  take  account.  They  compare  the  industrial  field  to  the 
turf.  But  on  the  turf  the  race  is  both  means  and  aim.  The  public 
takes  no  interest  in  the  contest  outside  of  the  contest  itself.  When 
you  start  your  horses  with  the  sole  aim  of  finding  out  which  is  the 
best  racer,  I  realize  that  you  should  equalize  the  loads.  But  if  your 
aim  were  to  have  a  piece  of  important  and  urgent  news  reach  the 
goal  as  soon  as  possible,  could  you,  without  inconsistency,  invent 
obstacles  for  the  one  that  offered  the  best  conditions  of  speed? 
That  is,  however,  what  you  are  doing  in  industry.  You  forget  its 
desired  result,  which  is  well-being ;  you  ignore  it,  indeed  you  sacri- 
fice it,  by  a  veritable  begging  of  the  question. 

But  since  we  cannot  lead  our  adversaries  to  our  point  of  view, 
let  us  assume  theirs ;  let  us  examine  the  question  from  the  stand- 
point of  production. 

I  shall  aim  to  establish : 

1.  That  to  equalize  the  conditions  of  labor  is  to  attack  the  prin- 
ciple of  exchange ; 

2.  That  it  is  not  true  that  the  labor  of  one  country  is  stifled  by 
the  competition  of  more  favored  nations ; 

3.  That  even  were  it  so,  protective  duties  do  not  equalize  the 
conditions  of  production ; 

4.  That  freedom  equalizes  those  conditions  as  much  as  they 
can  be  equalized ; 

5.  Finally,  that  it  is  the  least  favored  nations  that  gain  the  most 
by  exchange. 

I.  To  equalize  the  conditions  of  labor  is  not  only  to  obstruct  cer- 
tain exchanges,  it  is  to  attack  the  very  principle  of  exchange,  be- 
cause exchange  is  based  precisely  upon  that  diversity,  or,  if  you 
prefer,  upon  those  inequalities  of  fertility,  aptitudes,  climates, 
temperature,  which  you  wish  to  efface.  If  Guienne  sends  wines  to 
Brittany,  and  Brittany  sends  grain  to  Guienne,  it  is  because  these 
two  provinces  are  subject  to  different  conditions  of  production.  Is 
there  any  different  law  for  international  exchanges?  To  point  out, 
as  an  objection  to  them,  the  inequalities  of  conditions  which  give 
rise  to  them  and  explain  them  is  to  attack  them  for  the  very  thing 


302  BASTIAT 

which  constitutes  their  justification.  If  the  protectionists  were  in 
command  of  sufficient  logic  and  power,  they  would  reduce  men,  like 
snails,  to  complete  isolation.  There  is  not,  for  that  matter,  a  single 
one  of  their  sophisms,  which,  submitted  to  the  test  of  rigorous 
deductions,  does  not  end  in  destruction  and  futility. 

II.  It  is  not  true,  in  fact,  that  the  inequality  of  conditions  of  two 
similar  industries  necessarily  involves  the  failure  of  the  one  least 
favored.  On  the  turf  if  one  of  the  racers  wins  the  prize,  the  other 
loses  it ;  but  where  two  horses  labor  to  produce  something  useful, 
each  one  produces  according  to  the  measure  of  his  strength,  and 
it  does  not  follow  because  the  more  vigorous  one  yields  greater 
service  that  the  weaker  one  yields  none.  Wheat  is  cultivated  in 
all  the  departments  of  France,  notwithstanding  the  enormous  differ- 
ences of  fertility  among  them ;  and  if  it  happens  that  there  is  one 
that  does  not  cultivate  it,  it  is  because  it  is  not  good,  even  for  itself, 
that  it  should  do  so.  Likewise,  analogy  tells  us  that  under  the 
regime  of  freedom,  despite  similar  differences,  wheat  would  be  pro- 
duced in  every  country  in  Europe ;  and  if  it  turned  out  that  one 
of  them  abandoned  its  cultivation,  it  would  be  because  it  had  found, 
in  its  own  interest,  a  better  use  for  its  soil,  its  capital,  and  its  labor. 
And  why  does  not  the  fertility  of  one  department  paralyze  the 
husbandman  of  a  less  favored  neighboring  department  ?  Because 
economic  phenomena  have  a  flexibility,  an  elasticity,  and  resources 
of  equalization,  as  it  were,  which  seem  wholly  to  escape  the  spokes- 
men of  the  protectionist  school.  They  accuse  us  of  being  doc- 
trinaires ;  but  it  is  they  that  are  doctrinaires  of  the  most  extreme  type, 
if  the  doctrinaire  spirit  consists  in  constructing  arguments  upon  a  sin- 
gle fact  and  not  upon  the  totality  of  the  facts.  In  the  above  example 
it  is  the  difference  in  the  value  of  the  soil  which  compensates  for  the 
difference  of  fertility.  Your  field  yields  three  times  as  much  as 
mine.  Yes :  but  it  cost  you  ten  times  as  much,  and  I  am  still  able 
to  compete  with  you.  That  is  the  whole  mystery.  And  note  that 
superiority  in  some  respects  leads  to  inferiority  in  others.  It  is  just 
because  your  soil  is  more  fertile  that  it  is  dearer,  so  that  it  is  not  by 
accident  but  of  necessity  that  an  equilibrium  is  established  or  tends 
to  be  established ;  and  can  it  be  denied  that  freedom  is  the  regime 
which  favors  that  tendency  the  most? 


ECONOMIC  SOPHISMS  303 

I  have  cited  a  branch  of  agriculture;  I  could  just  as  well  have 
cited  a  branch  of  manufacture.  There  are  tailors  at  Quimper,  but 
that  does  not  prevent  there  being  tailors  in  Paris,  although  the 
latter  pay  so  much  more  for  their  rent,  their  furniture,  their  work- 
men, and  their  food.  But,  on  the  other  hand,  they  have  a  very 
different  clientele  and  that  is  sufficient,  not  only  to  restore  the 
balance,  but  even  to  make  it  incline  to  their  side. 

Even,  therefore,  in  considering  the  equalizing  of  the  conditions 
of  labor,  it  is  requisite  at  least  to  examine  whether  freedom  does 
not  accomplish  what  is  demanded  of  arbitrary  interference.  This 
natural  leveling  of  economic  phenomena  is  such  an  important  factor 
in  the  question,  and  at  the  same  time  so  fitted  to  arouse  our  admira- 
tion for  the  providential  wisdom  which  directs  the  leveling  govern- 
ment of  society,  that  I  beg  permission  to  pause  here  a  moment. 

The  protectionists  tell  you:  Such  a  nation  has  the  advantage 
over  us  of  cheap  coal,  iron,  machinery,  capital ;  we  cannot  compete 
with  them. 

This  proposition  will  be  examined  under  other  aspects.  For  the 
present  I  shall  confine  myself  to  the  question  of  ascertaining  whether, 
when  a  superiority  and  an  inferiority  exist  they  do  not  bear  within 
themselves  forces,  tending  the  one  upward  and  the  other  downward, 
which  must  bring  about  a  just  equilibrium. 

Here  are  two  countries,  A  and  B.  A  possesses  all  sorts  of  advan- 
tages over  B.  You  conclude  from  this  that  labor  is  concentrated  at 
A  and  that  B  is  powerless  to  accomplish  anything.  A,  you  say, 
sells  much  more  than  it  buys ;  B  buys  much  more  than  it  sells. 
I  could  dispute  that,  but  I  take  your  standpoint. 

According  to  the  hypothesis,  labor  is  in  great  demand  in  A,  and 
presently  its  price  rises. 

Iron,  coal,  land,  provisions,  capital,  are  in  great  demand  in  A,  and 
soon  they  rise  in  price. 

At  the  same  time,  labor,  iron,  coal,  land,  provisions,  capital,  are 
all  in  very  little  demand  in  B,  and  soon  everything  drops  in  price. 

Nor  is  this  all.  A  always  selling,  B  steadily  buying,  specie  passes 
from  B  to  A.    It  becomes  abundant  in  A,  scarce  in  B. 

Abundance  of  specie,  however,  signifies  that  much  of  it  is  re- 
quired to  purchase  anything.    Hence  in  A  to  the  real  dearness  caused 


304  BASTIAT 

by  a  very  active  demand  there  is  added  a  nominal  dearness  due  to 
the  excess  of  the  precious  metals. 

Scarcity  of  specie  signifies  that  little  of  it  is  required  to  make 
any  purchases.  Hence  in  B  a  nominal  cheapness  is  added  to  real 
cheapness. 

Under  these  circumstances,  industry  will  be  induced  by  all  sorts 
of  motives,  by  motives,  if  I  may  so  express  it,  carried  to  the  fourth 
power,  to  abandon  A  and  establish  itself  in  B. 

Or,  to  get  back  to  the  domain  of  facts,  let  us  observe  that  it  would 
not  wait  till  all  this  had  happened,  that  sudden  displacements  are 
repellent  to  its  nature,  and  that  it  would  from  the  outset,  under  a 
regime  of  freedom  have  progressively  divided  and  distributed  itself 
between  A  and  B,  according  to  the  laws  of  supply  and  demand ; 
that  is  to  say,  according  to  the  laws  of  justice  and  utility. 

And  when  I  say  that  if  it  were  possible  that  industry  should 
concentrate  itself  at  one  point  there  would  arise  within  its  own  bosom 
by  reason  of  that  very  fact  an  irresistible  force  of  decentralization, 
I  am  not  uttering  a  mere  hypothesis. 

Let  us  hear  what  was  said  by  a  manufacturer  in  the  Chamber 
of  Commerce  of  Manchester  (I  omit  the  figures  with  which  he 
supported  his  demonstration): 

''  Formerly  we  exported  cloths ;  then  this  exportation  made  way 
for  that  of  yarn,  which  is  the  raw  material  of  cloths ;  subsequently, 
for  that  of  machines,  which  are  the  instruments  of  production  of 
yarn ;  later  on,  for  that  of  capital,  with  which  we  construct  our 
machines ;  and  finally,  for  that  of  our  workmen  and  our  industrial 
genius,  which  are  the  source  of  our  capital.  All  these  elements  of 
labor,  one  after  the  other,  exercised  their  activity  where  they  found 
greater  advantages — where  living  was  cheaper  or  life  easier — and 
we  see  now  in  Prussia,  Austria,  Switzerland,  Italy,  enormous  fac- 
tories founded  with  English  capital,  manned  by  English  labor  and 
directed  by  English  engineers." 

You  can  readily  observe  that  nature,  or  rather  Providence,  more 
ingenious,  wiser,  more  foreseeing  than  your  narrow  and  rigid  theory 
supposes,  has  not  been  desirous  of  that  concentration  of  labor,  that 
monopoly  of  every  superiority,  about  which  you  argue  as  though 
it  were  an  absolute  and  irremediable  fact.  It  has  seen  to  it,  by 
means  as  simple  as  they  are  infallible,  that  there  shall  be  dispersion. 


ECONOMIC  SOPHISMS  305 

diffusion,  solidarity,  simultaneous  progress — all  things  which  your 
restrictive  laws  paralyze  as  far  as  in  them  lies ;  for  their  tendency, 
in  isolating  the  peoples,  is  to  render  the  diversity  of  their  condition 
much  more  marked,  to  prevent  equalization,  to  obstruct  coopera- 
tion, to  neutralize  natural  counterpoises,  and  to  keep  the  various 
peoples  fixed  in  their  respective  superiority  or  inferiority. 

III.  In  the  third  place,  to  say  that  the  conditions  of  production 
are  equalized  by  a  protective  duty  is  to  use  a  false  form  of  expres- 
sion as  the  vehicle  of  an  error.  It  is  not  true  that  an  import  duty 
equalizes  the  conditions  of  production.  They  remain  the  same  after 
the  duty  as  they  were  before.  What  the  duty  equalizes,  at  the 
utmost,  is  the  conditions  of  sale.  It  will  perhaps  be  said  that  I  am 
merely  playing  with  words,  but  I  return  the  accusation  to  my  adver- 
saries. It  is  for  them  to  prove  that  production  and  sale  are  synony- 
mous ;  otherwise  I  am  justified  in  charging  that,  if  they  do  not  play 
with  words,  they  at  least  confuse  the  meaning  of  them. 

Let  me  illustrate  my  point  by  an  example. 

Suppose  that  it  occurs  to  some  Parisian  speculators  to  engage  in  the 
cultivation  of  oranges.  They  know  that  Portuguese  oranges  can  be 
sold  in  Paris  for  10  centimes,  while  they,  on  account  of  their  necessary 
expenses,  the  hothouses  which  they  will  require,  the  cold  which  will 
often  injure  the  crop,  will  be  unable  to  ask  less  than  a  franc  as  a 
remunerative  price.  They  demand  that  the  oranges  of  Portugal 
should  have  a  duty  of  90  centimes  imposed  upon  them.  By  means 
of  that  duty,  the  conditions  of  production,  they  say,  will  be  equalized, 
and  the  Chamber  yielding,  as  usual,  to  such  an  argument,  inscribes 
upon  the  tariff  a  duty  of  90  centimes  per  foreign  orange. 

Very  well !  I  say  that  the  conditions  of  production  are  in  nowise 
changed.  The  law  has  not  taken  away  any  of  the  heat  of  the  sun  of 
Lisbon  nor  the  frequency  or  intensity  of  the  frosts  of  Paris.  The 
ripening  of  oranges  will  continue  to  go  on  naturally  on  the  banks  of 
the  Tagus  and  artificially  on  the  banks  of  the  Seine ;  that  is  to  say, 
it  will  require  much  more  human  labor  in  the  one  country  than  in  the 
other.  What  will  be  equalized  are  the  conditions  of  sale :  the  Portu- 
guese will  have  to  sell  their  oranges  at  a  franc,  of  which  90  centimes 
go  to  paying  the  tax.  It  will  evidently  be  paid  by  the  French  con- 
sumer. And  note  the  oddity  of  the  result.  Upon  each  Portuguese 
orange  consumed,  the  country  will  lose  nothing ;  for  the  90  centimes 


3o6  BASTIAT 

paid  in  excess  by  the  consumer  will  go  to  the  Treasury.  There  will 
be  a  displacement,  but  there  will  be  no  loss.  Upon  each  French 
orange  consumed,  however,  there  will  be  a  loss  of  90  centimes  or 
thereabout,  for  the  purchaser  will  surely  lose  it,  and  the  vendor 
will  likewise  surely  not  gain  it,  since,  according  to  the  hypothesis, 
he  will  have  obtained  only  the  ordinary  return  on  the  cost  of  pro- 
duction. I  leave  to  the  protectionists  the  task  of  recording  the 
conclusion. 

IV.  If  I  have  insisted  upon  this  distinction  between  the  conditions 
of  production  and  the  conditions  of  sale,  a  distinction  which  the  pro- 
tectionists will  no  doubt  find  paradoxical,  it  is  because  it  leads  me  to 
afflict  them  with  yet  another  paradox  much  stranger  still,  and  it  is 
this:  Do  you  really  want  to  equalize  the  conditions  of  production? 
Have  free  trade,  then. 

Now  really,  the  protectionists  will  say,  this  is  carrying  your  jeux 
d'esprit  too  far.  Well  then,  if  only  as  a  matter  of  curiosity,  I  beg 
the  advocates  of  protection  to  follow  my  argument  to  its  close.  It 
will  not  be  long.    I  return  to  rhy  example. 

If  one  agrees,  for  the  moment,  to  suppose  that  the  average  daily 
gain  of  every  Frenchman  is  one  franc,  it  will  indisputably  follow  that 
to  produce  an  orange  directly  in  France  it  will  take  a  day's  labor 
or  its  equivalent,  while  to  produce  what  would  pay  for  a  Portuguese 
orange  would  require  but  one-tenth  of  that  day,  which  signifies  sim- 
ply that  the  sun  does  in  Portugal  what  labor  does  in  Paris.  Now, 
is  it  not  evident  that  if  I  can  produce  an  orange,  or,  what  amounts 
to  the  same  thing,  the  wherewithal  to  purchase  it,  with  one-tenth 
of  a  day's  labor,  I  am  placed,  relatively  to  that  production,  exactly 
under  the  same  conditions  as  the  Portuguese  producer  himself,  bar- 
ring the  transportation,  the  cost  of  which  falls  upon  me?  It  is 
certain,  then,  that  freedom  equalizes  the  conditions  of  production, 
direct  or  indirect,  as  much  as  they  can  be  equalized,  since  it  allows 
only  an  inevitable  difference  to  remain,  that  of  transportation. 

I  add  that  freedom  equalizes  likewise  the  conditions  of  enjoyment, 
of  satisfaction,  of  consumption,  a  thing  which  is  never  taken  into 
account,  and  which  is  nevertheless  the  essential  point,  since  consump- 
tion is  clearly  the  ultimate  aim  of  all  our  industrial  efforts.  Thanks 
to  free  trade,  we  should  be  in  the  enjoyment  of  the  Portuguese  sun 
like  Portugal  itself ;  and  the  inhabitants  of  Havre  would  have  within 


ECONOMIC  SOPHISMS  307 

their  reach,  just  as  well  as  those  of  London,  and  under  the  same 
conditions,  the  advantages  that  nature  has  bestowed  upon  Newcastle 
in  the  way  of  mineral  resources. 

V.  You  protectionists  think  me  in  a  paradoxical  humor.  Well ! 
I  wish  to  go  still  further.  I  say,  and  I  believe  it  sincerely,  that  if 
two  countries  find  themselves  placed  under  conditions  of  unequal 
production,  it  is  the  one  that  is  least  favored  by  nature  that  has  most 
to  gain  by  freedom  of  exchange.  In  order  to  prove  it,  I  should 
have  to  depart  somewhat  from  the  form  suitable  to  this  work.  I 
shall  do  so,  however ;  first,  because  the  whole  question  is  here  in 
issue,  and  furthermore  because  it  will  furnish  me  with  an  occasion 
to  expound  an  economic  law  that  is  of  the  highest  importance,  and 
which,  if  properly  understood,  appears  to  me  calculated  to  bring 
back  to  the  science  all  those  sects  which  in  our  day  seek  in  the 
regions  of  chimeras  that  social  harmony  which  they  have  not  been 
able  to  discover  in  nature.  I  mean  the  law  of  consumption,  which 
most  economists  may  perhaps  be  reproached  with  having  neglected 
far  too  much. 

Consumption  is  the  end,  the  final  cause,  of  all  economic  phenom- 
ena, and  it  is  in  it,  consequently,  that  their  ultimate  and  definitive 
solution  is  to  be  found. 

In  the  making  of  every  product  nature  and  man  conspire.  But  the 
useful  part  that  nature  contributes  is  always  gratuitous.  It  is  only 
that  portion  of  utility  which  is  due  to  human  labor  that  constitutes 
the  object  of  exchange,  and  consequently  of  remuneration.  The 
latter  doubtless  varies  greatly  according  to  the  intensity  of  the 
work,  its  skilfulness,  promptitude,  timeliness,  the  demand  for  it, 
the  momentary  absence  of  competition,  etc.,  etc.  But  it  is  none  the 
less  true,  in  principle,  that  the  contribution  of  the  natural  laws 
which  are  common  to  all  does  not  enter  at  all  into  the  price  of 
the  product. 

We  do  not  pay  for  respirable  air,  although  it  is  so  useful  to  us 
that  without  it  we  could  not  live  two  minutes.  We  do  not  pay  for 
it,  however,  because  nature  supplies  it  to  us  without  the  intervention 
of  human  labor.  But  if  we  wish  to  separate  one  of  the  gases  which 
compose  it,  for  example  for  the  purpose  of  an  experiment,  we  must 
go  to  a  certain  amount  of  trouble ;  or  if  we  have  another  person  do 


3o8  BASTIAT 

the  work,  we  must  compensate  him  by  an  equivalent  amount  of  work 
which  we  have  expended  upon  some  other  product.  Whence  we  see 
that  the  subject-matter  of  exchange  is  exertion,  efforts,  labor.  It  is 
not  really  the  oxygen  that  I  am  paying  for,  since  it  is  at  my  disposal 
everywhere,  but  the  labor  that  was  required  to  release  it,  a  labor 
which  1  have  been  spared  and  which  I  must,  of  course,  pay  for. 
Will  it  be  objected  that  there  are  other  things  to  be  paid  for,  expendi- 
tures, materials,  apparatus?  But  in  these  things,  again  it  is  the 
labor  I  am  paying  for.  The  price  of  the  coal  employed  represents 
the  labor  that  was  required  to  extract  and  transport  it. 

We  do  not  pay  for  the  light  of  the  sun,  because  nature  lavishes 
it  upon  us.  But  we  pay  for  gaslight,  light  furnished  by  tallow,  oil, 
wax,  because  there  is  human  labor  to  be  paid  for ;  and,  be  it 
observed,  it  is  so  clearly  to  labor  and  not  to  utility  that  the  remunera- 
tion is  proportioned,  that  it  may  easily  happen  that  one  of  these 
forms  of  light,  though  much  more  intense  than  another,  is  neverthe- 
less cheaper.  It  suffices  for  this  that  the  same  amount  of  human 
labor  furnishes  more  of  it. 

If,  when  the  water-carrier  comes  to  supply  my  house,  I  had  to 
pay  him  according  to  the  absolute  utility  of  the  water,  my  means 
would  not  suffice.  But  I  pay  him  in  proportion  to  the  trouble  he 
has  taken.  If  he  demanded  more,  others  would  take  the  trouble, 
and,  finally,  if  need  be,  I  should  do  so  myself.  The  water  is  not 
in  reality  the  subject-matter  of  our  transaction ;  it  is  the  labor 
involved  in  connection  with  it.  This  point  of  view  is  so  important, 
and  the  conclusions  that  I  shall  draw  from  it  throw  so  much  light 
on  the  question  of  international  free  trade,  that  I  feel  I  must 
elucidate  my  thought  by  additional  examples. 

The  amount  of  alimentary  substance  contained  in  potatoes  does 
not  cost  us  very  much,  because  it  is  obtained  with  little  labor.  We 
pay  more  for  wheat,  because,  in  order  to  produce  it,  nature  demands 
a  greater  amount  of  human  labor.  It  is  obvious  that  if  nature  did 
for  the  latter  what  it  does  for  the  former  the  prices  would  tend  to 
equality.  It  is  not  possible  that  the  cultivator  of  wheat  should 
permanently  gain  much  more  than  the  cultivator  of  potatoes.  The 
law  of  competition  forbids  that. 

If,  by  a  fortunate  miracle,  the  fertility  of  all  arable  land  should 
be  increased,  it  is  not  the  farmer  but  the  consumer  who  would  reap 


ECONOMIC  SOPHISMS  309 

the  advantage  of  that  phenomenon,  because  it  would  result  in  abun- 
dance, in  low  prices.  There  would  be  less  labor  embodied  in  every 
hectolitre  of  grain,  and  the  farmer  could  exchange  it  only  for  a  less 
amount  of  labor  embodied  in  any  other  product.  If,  on  the  contrary, 
the  fertility  of  the  soil  were  suddenly  to  diminish,  nature's  share  in 
the  production  would  be  less,  that  of  labor  greater,  and  the  product 
dearer.  I  was  right  therefore  in  saying  that  it  is  in  the  domain  of 
consumption,  of  humanity,  that  all  economic  phenomena  find  their 
ultimate  significance.  So  long  as  their  effects  have  not  been  followed 
out  to  that  point,  so  long  as  one  stops  at  the  immediate  effects,  at 
those  which  affect  a  man  or  a  class  of  men  in  their  capacity  as 
producers,  one  is  not  an  economist — any  more  than  a  person  would 
be  a  physician  who,  instead  of  observing  the  effects  of  a  beverage 
upon  the  whole  system,  should  be  satisfied  to  judge  of  its  working 
by  observing  how  it  affects  the  palate  or  the  throat. 

The  tropical  regions  are  greatly  favored  for  the  production  of 
sugar,  of  coffee.  This  means  that  nature  performs  the  greatest 
part  of  the  work  and  leaves  little  for  labor  to  do.  But  who  then 
reaps  the  advantages  of  this  liberality  of  nature?  It  is  not  those 
regions,  for  competition  brings  it  about  that  they  obtain  only  the 
remuneration  of  labor;  it  is  humanity,  for  the  result  of  that  liber- 
ality is  termed  cheapness,  and  cheapness  belongs  to  everybody. 

Take  a  temperate  region  in  which  coal  and  iron  ore  are  found  at 
the  surface  of  the  land,  where  you  have  but  to  stoop  to  get  them. 
At  first,  the  inhabitants  will  profit  by  this  happy  circumstance,  I 
quite  agree.  But  before  long,  competition  intervening,  the  price  of 
coal  and  iron  will  drop  to  a  point  where  nature's  gift  will  be  gratui- 
tously acquired  by  all  and  there  will  remain  only  remuneration  for 
human  labor,  at  the  ordinary  rate. 

Thus  the  bounteousness  of  nature,  like  the  improvements  intro- 
duced in  the  processes  of  production,  is,  or  tends  steadily  to  become, 
under  the  law  of  competition,  the  common  and  gratuitous  heritage 
of  the  consumers,  of  the  masses,  of  humanity.  Hence  the  countries 
that  do  not  possess  those  advantages  have  everything  to  gain  by 
exchanging  with  those  who  do  possess  them,  because  the  exchange 
takes  place  between  the  efforts  involved,  without  regard  to  the 
natural  utilities  bound  up  with  those  efforts;  and  it  is  evidently 
the  most  favored  countries  that  have  embodied  most  of  these  natural 


310  BASTIAT 

utilities.  Their  products,  representing  less  labor,  exchange  for  less ; 
in  other  words,  they  are  cheaper,  and  if  all  the  bounty  of  nature 
resolves  itself  into  cheapness,  evidently  it  is  not  the  producing  but 
the  consuming  country  that  reaps  its  benefits. 

This  circumstance  shows  us  the  enormous  absurdity  of  a  consum- 
ing country  that  rejects  a  product  just  because  it  is  cheap ;  it  is  as 
if  it  said:  "I  don't  want  anything  that  nature  gives.  You  demand 
of  me  two  units  of  labor  in  order  to  supply  me  with  a  product  that 
I  can  produce  only  by  four  units  of  labor ;  you  are  able  to  do  it 
because  in  your  case  nature  has  done  half  the  work.  Well !  as  for 
me,  I  reject  it,  and  I  shall  wait  until  your  climate  becomes  more 
inclement  and  will  compel  you  to  demand  of  me  four  units  of  labor, 
so  that  I  can  trade  with  you  upon  an  equal  footing." 

A  is  a  favored  country.  B  is  a  country  harshly  treated  by  nature. 
I  say  that  exchange  is  advantageous  to  both  of  them,  but  particularly 
to  B,  because  exchange  does  not  consist  of  utilities  against  utilities, 
but  of  value  against  value.  Now,  A  contributes  more  utilities  under 
the  same  value,  since  the  utility  of  the  product  embraces  what  nature 
and  labor  together  have  contributed  to  it,  while  the  value  corre- 
sponds only  to  what  labor  has  contributed.  Thus,  B's  transaction 
is  wholly  to  his  advantage.  In  paying  the  producer  of  A  simply  for 
his  labor,  he  receives  into  the  bargain  more  utilities  than  he  gives. 

Let  us  state  the  general  rule. 

Exchange  is  a  bartering  of  values,  and,  value  being  reduced  by 
competition  to  represent  labor,  exchange  is  a  bartering  of  equal 
quantities  of  labor.  What  nature  has  done  for  the  exchanged  prod- 
ucts is  given  gratuitously  and  into  the  bargain  on  one  side  and  the 
other,  whence  it  strictly  follows  that  exchange  with  the  countries 
most  favored  by  nature  is  the  most  advantageous. 

The  theory  of  which  T  have  in  this  chapter  sought  to  trace  the 
lines  and  contours  would  demand  a  very  comprehensive  treatment. 
I  have  considered  it  only  in  its  relations  with  my  subject,  commercial 
freedom.  But  perhaps  the  attentive  reader  may  have  perceived  in 
it  the  fruitful  germ  which  when  fully  developed  should  stifle  not 
only  protectionism  but  Fourierism,  Saint-Simonism,  communism,  and 
all  those  schools  which  have  for  their  object  the  exclusion  from  the 
government  of  the  world  of  the  law  of  competition.  Regarded  from 
the  point  of  view  of  the  producer,  competition  no  doubt  often  clashes 


ECONOMIC  SOPHISMS  311 

with  our  individual  and  direct  interests.  But  if  we  take  the  point  of 
view  of  the  general  aim  of  all  labor,  of  the  universal  well-being,  in  a 
word,  of  consumption,  we  shall  find  that  competition  plays,  in  the 
moral  world,  the  same  role  that  equilibrium  does  in  the  material 
world.  It  is  the  basis  of  true  communism,  of  true  socialism,  of  that 
equality  of  well-being  and  of  conditions  so  greatly  desired  in  our 
day ;  and  if  so  many  sincere  publicists,  so  many  reformers  of  good 
faith,  demand  these  things  from  arbitrary  interference,  it  is  because 
they  do  not  comprehend  liberty. 


VII 

Petition  of  the  Manujacturers  of  Candles,  Tapers,  Lamps, 
Chandeliers,  Reflectors,  Snuffers,  Extinguishers,  and  of 
the  Producers  of  Tallow,  Oil,  Resin,  Alcohol,  and,  in 
General,  Everything  Connected  with  Illumination. 

To  the  Members  of  the  Chamber  of  Deputies, 

Gentlemen :  You  are  on  the  right  road.  You  reject  abstract 
theories ;  abundance,  cheapness,  impress  you  but  little.  You 
concern  yourself  chiefly  with  the  fate  of  the  producer.  You 
want  to  free  him  from  foreign  competition;  in  short,  you  want 
to  reserve  the  national  market  to  national  labor. 

We  come  to  offer  you  an  admirable  opportunity  to  apply 
your — what  shall  we  say?  your  theory?  No,  nothing  is 
more  deceptive  than  theory.  Your  doctrine?  Your  system? 
Your  principle?  But  you  do  not  like  doctrines,  you  have  a 
horror  of  systems,  and,  as  for  principles,  you  assert  that  there 
are  no  such  things  in  social  economy ;  we  will  say,  then,  your 
practice,  your  practice  without  theory  and  without  principle. 
We  are  subjected  to  the  intolerable  competition  of  a  foreign 
rival,  enjoying,  as  it  appears,  conditions  so  far  superior  to 
ours,  for  the  production  of  light,  that  he  inundates  our  na- 
tional market  at  fabulously  reduced  prices,  for  as  soon  as  he 
shows  himself  our  sales  cease,  all  the  consumers  turn  to  him, 
and  a  branch  of  French  industry  whose  ramifications  are 
innumerable  is  all  of  a  sudden  smitten  with  utter  stagnation. 
That  rival,  which  is  no  other  than  the  sun,  wages  a  war  with 


312  BASTIAT 

us  so  inexorable  that  we  suspect  he  is  stirred  up  by  perfidious 
Albion  (good  diplomacy  as  times  go!)  since  he  treats  that 
haughty  island  with  a  consideration  dispensed  with  in  our  case. 

We  demand  that  you  pass  a  law  which  shall  ordain  the 
closing  of  all  windows,  dormer-windows,  reflectors,  shutters, 
curtains,  casements,  bull's-eyes,  shades,  in  short,  of  all  open- 
ings, holes,  slits,  and  fissures,  through  which  the  sun  is  accus- 
tomed to  penetrate  into  houses,  to  the  prejudice  of  the  fine 
industries  with  which  we  flatter  ourselves  we  have  endowed 
the  country,  which  could  not  without  ingratitude  abandon  us 
to  so  unequal  a  conflict. 

We  beg  you,  gentlemen,  not  to  look  upon  our  request  as  a 
satire,  and,  at  least,  not  to  reject  it  without  listening  to  the 
reasons  that  we  advance  in  support  of  it. 

And  in  the  first  place,  if  you  close,  as  far  as  possible,  all 
access  to  natural  light,  if  you  thus  create  a  need  of  artificial 
light,  what  industry  in  France  is  there  that  would  not  in  the 
end  be  encouraged  ? 

If  more  tallow  is  consumed,  more  oxen  and  sheep  will  be 
needed,  and  we  shall,  in  consequence,  see  an  increase  of  arti- 
ficial meadows,  of  meat,  wool,  leather,  and,  above  all,  of 
fertilizers,  that  basis  of  all  agricultural  wealth. 

If  more  oil  is  consumed,  we  shall  see  the  poppy,  the  olive- 
tree,  colza,  more  extensively  cultivated.  These  rich  and  ex- 
hausting plants  will  opportunely  benefit  by  the  fertility  that 
the  breeding  of  cattle  will  have  communicated  to  our  soil. 
Our  heaths  will  be  covered  with  resinous  trees.  Numerous 
swarms  of  bees  will  gather  on  our  mountains  the  perfumed 
treasures  which  to-day  are  uselessly  dissipated  like  the 
flowers  whence  they  originate.  There  is  thus  not  a  single 
branch  of  agriculture  which  would  not  be  greatly  developed. 

The  same  is  the  case  with  navigation :  thousands  of  vessels 
will  be  engaged  in  whale  fishery,  and  before  long  we  shall  have 
a  navy  capable  of  maintaining  the  honor  of  France  and  of 
answering  to  the  patriotic  susceptibility  of  the  undersigned 
petitioners,  candle  merchants,  etc. 

But  what  shall  we  say  of  the  specialties  of  Paris  ?  Imagine 
the  gilding,  the  bronzes,  the  crystals  in  chandeliers,  lamps, 


ECONOMIC  SOPHISMS  313 

candlesticks,  candelabra,  glittering  in  spacious  warehouses 
by  the  side  of  which  those  of  to-day  are  mere  insignificant 
shops. 

Down  to  the  very  resin-gatherer  on  his  moorland  heights, 
or  to  the  sad  miner  in  the  depths  of  his  dark  gallery,  there 
is  no  one  who  will  not  see  his  wages  and  his  well-being 
augmented. 

Reflect  upon  it,  gentlemen,  and  you  will  become  convinced 
that  there  is  perhaps  not  a  single  Frenchman,  from  the  wealthy 
shareholder  to  the  humblest  match-vendor,  whose  condition 
would  not  be  ameliorated  by  the  success  of  our  request. 

We  foresee  your  objections,  gentlemen ;  but  you  will  not 
oppose  us  with  a  single  one  of  them  which  you  have  not 
gathered  in  the  antiquated  books  of  the  partisans  of  com- 
mercial freedom.  We  defy  you  to  say  one  word  against  us 
which  will  not  at  once  rebound  against  yourselves  and  against 
the  principle  which  governs  your  entire  policy. 

Will  you  tell  us  that  if  we  profit  by  this  protection  France 
will  not  profit,  because  the  consumer  will  pay  the  cost  of  it  ? 

We  will  answer  you :  You  no  longer  have  the  right  to 
invoke  the  interests  of  the  consumer.  When  he  was  at  odds 
with  the  producer,  you  sacrificed  him  on  every  occasion. 
You  did  it  in  order  to  encourage  labor,  to  enlarge  the  field  of 
labor.    You  ought  to  do  it  again  for  the  same  motive. 

You  yourselves  have  met  the  objection.  When  you  were 
told  that  the  consumer  is  interested  in  the  free  importation 
of  iron,  coal,  sesame,  wheat,  textiles,  you  said  Yes,  but  the 
producer  is  interested  in  their  exclusion.  Well,  then !  If  the 
consumers  are  interested  in  the  admission  of  natural  light, 
the  producers  are  interested  in  its  interdiction. 

But,  you  went  on  to  say,  the  producer  and  the  consumer 
are  one  and  the  same.  If  the  manufacturer  profits  by  protec- 
tion, he  will  cause  the  farmer  to  profit.  If  agriculture  pros- 
pers, it  will  open  markets  for  the  factories.  Very  well !  If 
you  grant  us  the  monopoly  of  illumination  during  the  day, 
we  shall,  in  the  first  place,  purchase  quantities  of  tallow, 
coal,  oil,  resin,  wax,  alcohol,  silver,  iron,  bronze,  crystals,  to 
feed  our  industry,  and,  furthermore,  we  and  our  numerous 


314  BASTIAT 

supplies  having  grown   rich,   we  shall   consume   much   and 
spread  comfort  to  all  the  branches  of  national  industry. 

Will  you  say  that  the  sunlight  is  a  free  gift,  and  to  reject 
free  gifts  would  be  to  reject  wealth  itself  under  the  pretext 
of  encouraging  the  means  of  acquiring  it? 

Then  observe  that  you  are  striking  a  mortal  blow  at  the 
very  heart  of  your  policy;  observe  that  hitherto  you  have 
always  rejected  the  foreign  product  precisely  because  it  ap- 
proximates the  character  of  a  free  gift,  and  all  the  more  the 
more  it  approximates  it.  For  compliance  with  the  importuni- 
ties of  the  other  monopolists  you  had  but  a  half-motive ;  for 
the  granting  of  our  demand  you  have  a  complete  motive; 
and  to  reject  our  appeal  on  the  ground  that  it  is  better 
grounded  than  those  others  would  be  to  state  the  equation 

^  x=  -\ ;  in  other  words,  it  would  be  heaping  absurdity 

upon  absurdity. 

Labor  and  nature  combine  in  varied  proportions,  according 
to  countries  and  climates,  in  the  creation  of  a  product.  The 
part  that  nature  contributes  to  it  is  always  gratuitous;  it  is 
labor's  part  that  gives  it  value  and  is  remunerated. 

If  a  Lisbon  orange  is  sold  at  half  the  price  of  a  Paris 
orange,  it  is  because  a  natural,  and  consequently  a  gratuitous, 
heat  does  for  the  one  what  the  other  owes  to  an  artificial, 
and  therefore  a  costly,  heat. 

Hence,  when  we  get  an  orange  from  Portugal,  it  may  be 
said  that  it  is  given  us  half  gratuitously,  half  on  account  of 
the  labor  involved,  or,  in  other  words,  at  half  price  relatively 
to  those  of  Paris. 

Now  it  is  precisely  upon  this  half  gratuity  (pardon  the 
word)  that  you  base  your  argument  for  its  exclusion.  You 
say:  How  can  home  labor  stand  the  competition  of  foreign 
labor,  when  the  former  has  to  do  everything,  and  the  latter 
has  to  do  only  half  the  work,  the  sun  taking  the  rest  upon 
itself?  But  if  a  half  gratuity  determines  you  to  shut  out 
competition,  how  is  it  that  a  complete  gratuity  would  lead 
you  to  admit  competition?  You  are  either  no  logicians  or, 
since  you  reject  the  half  gratuity  as  injurious  to  our  national 


ECONOMIC  SOPHISMS  315 

labor,  you  must  a  fortiori  and  with  twice  the  emphasis  reject 
the  complete  gratuity. 

Once  more,  if  a  product,  coal,  iron,  wheat,  or  textiles, 
comes  to  us  from  outside,  and  we  can  obtain  it  with  less  labor 
than  if  we  produced  it  ourselves,  the  difference  is  a  gift  which 
is  granted  us.  That  gift  is  more  or  less  considerable,  accord- 
ing as  the  difference  is  greater  or  less.  It  is  a  quarter,  a  half, 
three-quarters  of  the  value  of  the  product,  if  the  foreigner 
asks  only  three-quarters,  half,  quarter  payment.  It  is  as  com- 
plete as  possible  when  the  donor,  as  in  the  case  of  the  sun 
for  light,  demands  nothing.  The  point  is,  and  we  state  it 
formally,  to  ascertain  whether  you  desire  for  France  the 
benefit  of  gratuitous  consumption  or  the  pretended  advan- 
tages of  onerous  labor.  Choose,  but  be  logical ;  for  inas- 
much as  you  will  shut  out,  as  you  do,  coal,  iron,  wheat, 
foreign  textiles,  in  proportion  as  their  price  approaches  zero, 
how  inconsistent  it  is  to  admit  the  light  of  the  sun,  whose 
price  is  actually  zero  throughout  the  entire  day ! 


XII 

MELINE:   REPORT  OF  THE  TARIFF  COMMISSION^ 


* 


IT  DEVOLVES  upon  me  now  to  acquaint  you  with  the  principles 
which  have  guided  your  Commission,  and  the  general  reasons 
which  justify  its  main  contentions.  As  to  the  tariff  details,  the  spe- 
cial reports  will  supply  you  with  explanations  of  a  kind  to  prove  the 
correctness  of  the  figures  which  we  have  adopted. 

By  a  sort  of  tacit  agreement,  we  excluded  from  the  discussion, 
from  the  outset,  all  speculative  controversies,  all  academic  theories. 
We  did  not  inaugurate  our  work  by  entering  the  lists  in  favor  of 
free  trade  or  of  protection,  as  was  done  by  previous  tariff  commis- 
sions. None  of  us  maintained  that  France  should  be  made  to 
follow  a  policy  of  laissez-jaire  et  laisser-passer,  that  she  ought  to 
resign  herself  to  produce  only  what  she  could  manufacture  cheaper 
than  others;  finally,  that  the  interest  of  the  consumer  transcended 
that  of  the  producer  and  that  everything  should  be  sacrificed  to  him. 

However,  if  theoretical  questions  did  not  form  the  subject  of  a 
regular  debate,  it  is  indubitable  that  they  were  found,  with  shades 
of  distinction,  at  the  basis  of  all  the  important  resolutions.  Tenden- 
cies towards  free  trade  or  protection  collided  with  each  other,  as 
they  always  do,  and  it  was  evident  from  the  first  day  that  the  Com- 
mission was  divided  into  two  distinct  camps,  entertaining  different 
views  and  different  aims. 

The  first,  which  formed  a  minority  of  the  Commission,  embraced 
the  members  whose  economic  ideal  is  manifestly  the  principle  of 
commercial  freedom ;  but  the  eminent  and  able  men  who  compose 
it  realize  the  actual  situation  too  clearly  to  think  for  a  moment  of 
demanding  an  immediate  application  of  their  doctrine.    They  did 

iMelinc,  F.  J.  (1838-  ),  Rapport  General  fait  au  nom  de  la  Commission 
des  Douanes  chargee  d'e.xamincr  le  projet  dc  loi  relatif  a  retablisscment  du  tarif 
general  des  douanes  (1892). 

3'6 


REPORT  OF  THE  TARIFF  COMMISSION  317 

not  even  urge  that  France  should  at  present  proceed  a  step  further 
in  that  direction.  They  would  be  satisfied  with  the  step  taken  in 
i860,  and  it  is  towards  this  that  they  have  steadily  directed  their 
economic  policy.  All  their  efforts  have  tended  to  maintain,  in 
principle,  the  regime  of  the  treaties  of  i860,  particularly  the  duties 
as  a  whole  which  were  appended  to  them  and  which  were  but 
slightly  modified  in  1881. 

The  majority  of  your  Commission  brought  another  view  to  bear 
upon  the  actual  situation  of  our  country  and  upon  the  system  best 
adapted  to  develop  its  riches  and  the  well-being  of  its  workers.  It 
does  not  regard  a  protective  tariff  as  an  absolute  principle,  a  sort  of 
dogma,  as  has  so  long  been  done  in  the  case  of  free  trade ;  it  sees 
in  protection,  as  in  free  trade,  only  measures  of  international  regu- 
lation of  exchange  good  or  bad  according  to  time,  place,  the  eco- 
nomic and  financial  condition  of  the  different  peoples.  In  its  view, 
that  is  best  for  a  nation  which  assures  to  it  the  greatest  amount  of 
work,  since  the  greater  the  quantity  of  work,  the  greater  is  the 
amount  of  capital,  and  consequently  of  wages  for  the  working 
masses. 

It  is  not  astonished  that  England  has  adopted  free  trade  and 
urges  all  other  nations  to  follow  the  same  policy ;  her  own  interest, 
indeed,  commands  her  to  do  so.  When  one  enjoys,  as  she  does, 
natural  advantages  which  secure  preeminence  over  most  of  the 
countries  of  the  world,  when  one  has  an  advance  of  over  a  century 
and  superabundant  production,  it  is  easy  to  open  the  doors  to  all 
the  world ;  for  no  one  is  feared  at  home,  and  other  countries  must 
at  all  costs  be  invaded.  That  is  why  Cobden  was  a  true  benefactor 
of  his  country  in  procuring  for  it  in  France,  and,  thanks  to  France, 
in  all  Europe,  unexpected  outlets. 

Who  would  dare  to  maintain  that  the  situation  of  France  is  in 
any  respect  whatever  comparable  to  that  of  England?  All  the 
mighty  agencies  of  production  which  nature  has  lavished  upon 
England — iron,  coal,  etc.,  an  unequaled  geographical  position — 
have  been  parsimoniously  granted  to  us,  and  we  are  but  too  often 
compelled  to  produce  at  a  much  higher  cost  than  our  rival.  To 
these  natural  advantages  must  be  added  those  which  she  derives 
from  her  formidable  maritime  power,  the  concentration  of  her 
industries,  and  the  vast  scale  of  her  principal  productions. 


3i8  MELINE 

In  treating  with  her  we  should  never  have  lost  sight  of  these 
causes  of  inferiority,  insurmountable  for  us,  and  duties  should  have 
been  imposed  in  accordance  with  them ;  we  should,  above  all, 
never  have  forgotten  that  the  domestic  market  of  France  is  one  of 
the  finest  and  most  envied  in  the  world,  that  it  represents  an  annual 
revenue  of  about  34  billion  francs,  and  that  it  was  folly  to  sacrifice 
a  fortune  so  solidly  acquired  to  the  mere  hope  of  increasing  our 
exports.  We  know  to-day  how  thoughtlessly,  with  what  culpable 
generosity  on  our  part,  the  duties  of  i860  were  fixed;  they  were 
so  much  below  the  divergence  which  differentiates  production  in 
the  two  countries,  that  a  great  npmber  of  industries  were  endan- 
gered. Many  would  have  been  given  up  but  for  the  energy,  the 
elasticity,  of  our  industrial  genius,  the  ability  of  our  workmen, 
and,  above  all,  our  admirable  spirit  of  economy  which  permits  us 
to  be  satisfied  with  earnings  often  ridiculously  low ;  but  they  drag 
along  painfully,  unable  to  have  full  play,  and  have  for  thirty  years 
struggled,  discouraged,  with  ever  increasing  difficulties.  The  same 
error  was  committed  when,  after  negotiating  with  England,  and 
impelled  in  the  direction  of  imprudent  concessions,  we  negotiated 
with  the  other  countries ;  and  thus  our  domestic  market,  of  which 
we  were  the  undisputed  masters  in  i860,  was  delivered  over  to  the 
progressive  invasion  of  foreign  products. 

Treaties  of  i860 

Of  course,  we  must  not  exaggerate  anything,  and  we  shall  not 
go  the  length  of  saying  that  the  treaties  of  i860  have  ruined 
France.  We  will  even  admit,  if  so  desired,  that  for  certain  of  our 
industries  the  existing  duties  might  have  been  lowered  without 
detriment ;  but  it  should  have  been  done  with  discretion,  defending 
French  interests  inch  by  inch,  instead  of  surrendering  them,  as  was 
done,  with  closed  eyes,  in  the  privacy  of  a  cabinet  of  ministers. 

If  the  treaties  of  i860  did  not  produce  all  the  untoward  results 
that  might  have  been  feared,  it  is  because  France  at  that  time  en- 
joyed a  comparative  prosperity  which  it  did  not  forfeit  at  once,  and 
which,  it  must  be  recognized,  she  owed  in  great  part  to  the  protec- 
tive system  under  which  it  was  developed.  And  besides,  she  bene- 
fited, like  the  rest  of  the  world,  by  the  great  discoveries  which  at 


REPORT  OF  THE  TARIFF  COMMISSION  319 

that  period  transformed  all  the  conditions  of  production.  The 
powerful  impulse  given  to  labor  by  the  development  of  railways  and 
of  maritime  transportation,  by  the  telegraph  and  the  improvement 
of  the  postal  service,  counterbalanced  for  a  certain  time  the  inade- 
quacy of  our  economic  policy. 

But  what  we  are  entitled  to  assert  is  that  if  the  treaties  of  i860 
had  been  better  conceived  in  the  interest  of  France  and  better 
drawn  up,  if  they  had  not  by  a  deplorable  condescension  towards 
the  foreigner — the  facts  of  which  are  known  to  us  to-day — so 
gratuitously  sacrificed  our  agriculture  and  so  many  of  our  indus- 
tries, France  would  not  have  experienced  the  cruel  trials  which 
have  been  inflicted  upon  her.  She  would  be  to-day,  from  an 
economic  and  financial  point  of  view,  in  an  infinitely  better  posi- 
tion; her  industrial  and  her  national  capital  would  be  greater. 

Facts  are  at  hand  which  fully  demonstrate  this  contention ;  they 
prove  that  the  upward  movement  of  affairs  in  France  in  the  ten 
years  preceding  the  treaties  of  i860  has,  from  that  year  on,  shown 
retardation  instead  of  acceleration. 

*********** 

The  consequence  is  that  France,  which  in  1859  was  a  creditor 
of  the  foreigner  to  the  amount  1,341,000,000  francs  for  the  excess 
of  exports  over  its  imports  of  manufactured  products,  is  now,  1888, 
only  so  to  the  sum  of  1,098,000,000  francs.  Even  if  we  take  the 
years  1889  and  1890,  which  our  Exposition  rendered  so  favorable 
to  the  export  of  our  manufactured  products,  the  excess  of  our 
exports  is  only,  for  1889,  1,280,000,000;  for  1890,  1,312,000,000 
—  that  is  to  say,  less  than  that  of  1859. 

We  may  judge  from  these  few  figures  the  benefit  that  France  has 
derived  from  the  treaties  of  i860,  of  those  treaties  which  were  in- 
tended above  all,  in  the  conception  of  its  author,  to  cause  such  a 
marvelous  development  of  our  export  of  manufactured  products, 
and  which  have  in  reality  only  served  to  favor  the  invasion  of 
our  own  market. 

I  know  quite  well  that  the  objection  is  made  that  the  general 
balance  of  trade  is  not  to  be  found  wholly  in  the  tariff  tables,  that  it 
is  composed  of  many  other  factors,  such  as  French  investments 
abroad,  the  money  spent  by  foreigners  in  France,  the  profit  upon 
our  exports,  etc.    We  willingly  admit  all  that,  but  it  may  well  be 


320  MELINE 

conceded  to  us  that  the  activities  of  international  exchange,  such 
as  is  represented  in  the  tariff  tables,  form,  at  all  events,  one  of  the 
very  important  factors  of  the  general  balance  of  trade,  and  we 
certainly  have  a  right  to  note  that  the  regime  of  i860  does  not 
seem  to  have  improved  that  factor,  but  quite  the  contrary. 

It  is  evident  that  we  should  be  richer  if  our  exports  had  been 
greater  and  our  imports  less ;  it  is  equally  obvious  that  if  the 
balance  is  considered  from  the  point  of  view  of  the  aggregate  of 
French  labor,  it  must  be  admitted  that  the  balance  yielded  us  by 
foreigners  through  the  increase  of  their  purchases  has  by  no  means 
compensated  for  that  which  they  took  from  us  by  their  sales. 

Increase  of  Duties  in  Foreign  Countries 

If  we  look  around  us,  on  the  other  hand,  we  shall  notice  that  the 
various  countries  of  the  world,  with  few  exceptions,  have  pursued  a 
policy  distinctly  different  from  ours.  We  shall  remark,  above  all, 
that  those  that  were  subjected,  like  us,  to  the  duties  of  i860  and 
have  altered  them,  have  improved  their  economic  situation,  which 
presents  a  striking  contrast  to  that  of  our  country. 

Let  us  not  discuss  America,  which  has  developed  so  prodigiously 
under  the  shelter  of  the  protective  system  that  to-day  she  commits 
the  error  of  exaggeration  without  any  necessity.  Let  us  not  even 
talk  of  Russia,  which  has  likewise  made  such  great  progress  for 
some  years,  because  it  would  perhaps  be  retorted  that  it  is  an 
entirely  new  country  which  advances  by  a  natural  and  irresistible 
impulse.  But  let  us  take  Germany,  let  us  take  Austria-Hungary, 
which  in  the  last  decade  have  raised  their  duties  in  such  considerable 
proportions,  and  let  us  see  the  results  obtained.  If  we  consider  a 
period  of  ten  years,  from  1878  to  1888,  we  ascertain  that  in  Ger- 
many exports  did  not  cease  to  increase,  while  imports  diminished  in 
a  significant  measure.  From  the  figure  of  3,608,000,000  francs  which 
exports  had  already  attained  in  1878,  they  rose  in  1888  to  4,007,- 
000,000.  As  to  the  imports,  which  attained  in  1878  the  sum  of 
4,892,000,000,  they  dropped  in  1888  to  4,043,000,000.  It  follows 
that  Germany,  which  in  1878  was  a  debtor,  by  reason  of  its  excess 
of  importations,  to  the  extent  of  1,283,000,000,  was  so  only  to  the 
sum  of  106,000^009  ill  1888.    If  instead  of  going  back  ten  years  we 


REPORT  OF  THE  TARIFF  COMMISSION  321 

should  go  back  twenty  years,  the  results  would  be  still  more  strik- 
ing. Doubtless  this  ascending  movement  could  not  continue  in- 
definitely, and  we  freely  admit  that  at  present  it  seems  to  have 
come  to  a  halt. 

In  Austria-Hungary  the  results  have  been  less  brilliant,  but  they 
are  nevertheless  very  satisfactory.  The  exports,  which  in  1878 
amounted  to  1,363,000,000,  rose  in  1888  to  1,518,000,000.  As  for 
the  imports,  they  decreased  from  1,150,000,000,  the  sum  for  1878, 
to  1,110,000,000,  the  sum  for  1888.  The  difference  in  favor  of 
the  exports,  which  in  1878  amounted  to  only  231,000,000,  rose, 
therefore,  in  1888  to  407,000,000.  It  seems  to  us  that  a  system 
which  produces  such  results  is  not  calculated  to  discourage  those 
who  may  be  tempted  to  imitate  it. 

These  examples  suffice  to  demonstrate,  contrary  to  a  thesis  main- 
tained for  a  long  time  and  which  still  counts  ardent  followers,  that  a 
nation  can  defend  its  home  market  without  for  that  reason  sacrific- 
ing its  exports.  The  United  States  had  already  clearly  illustrated 
that  truth,  and  the  only  resource  left  for  challenging  the  authority 
of  such  an  example  was  to  represent  it  as  an  exceptional  country 
which  could  not  be  compared  with  any  other.  But,  lo  and  behold, 
the  same  phenomenon  is  produced  in  the  very  heart  of  Europe  under 
conditions  such  as  no  longer  permit  the  denial  of  its  demonstrative 
force. 

It  is  finally  beginning  to  be  understood  that  exports  are  primarily 
the  consequence  of  prosperous  production,  in  secure  possession  of 
the  home  market,  impelled  by  its  very  successes  to  seek  outlets 
abroad,  capable,  if  need  be,  of  sacrifices  in  order  to  procure  them ; 
that,  on  the  contrary,  a  precarious  production,  one  constantly 
threatened,  unable  to  grow,  and  lacking  capital,  has  a  fatal 
tendency  to  retire  within  itself,  and  does  not  willingly  risk  going 
beyond  the  country's  frontiers. 

The  results  obtained  in  the  various  countries  which  for  twenty 
years  have  made  a  point  of  defending  their  national  production  have, 
indeed,  been  of  a  nature  to  strike  French  minds ;  they  would  suffice 
to  explain  the  irresistible  movement  which  so  urgently  demands  the 
denunciation  of  our  commercial  treaties  and  the  revision  of  our 
economic  system  in  the  direction  of  increasing  the  protection  of  the 
nation's  labor. 


322  MELINE 

That  which  has  been  done  by  other  peoples  compels  us,  indeed,  to 
adopt  measures  at  home,  if  we  do  not  wish  to  be  the  only  ones  to 
suffer  the  consequences  of  their  tariff  policy.  The  inevitable  result 
of  the  high  duties  behind  which  they  entrench  themselves  is  to  throw 
back  upon  ourselves  the  entire  surplus  of  production  which  seeks  a 
market  the  world  over  and  which  formerly  found  assured  outlets. 
If  we  look  over  the  table  of  our  importations  of  the  last  fifteen  years 
we  find  them  perceptibly  increasing  in  proportion  as  the  principal 
countries  of  Europe  raise  their  tariff  barriers.  If  we  do  not  give 
heed  to  this,  we  shall  end  by  becoming  the  drain  of  the  whole  of 
Europe.  Is  it  right,  is  it  wise,  to  persist  in  keeping  our  doors  open 
when  all  others  are  proceeding  to  close  theirs? 

This  reflux  movement  is  encouraged  and  facilitated  by  some  of 
our  nearest  competitors  by  the  intentional  lowering  of  the  freight 
rates  applied  to  the  principal  products  directed  towards  our  frontiers. 
In  those  countries  the  transportation  industry  is  not  regarded  as  an 
ordinary  one,  free,  independent  in  its  activities,  with  a  right  to  seek 
its  profits  wherever  it  may  find  them.  It  is  dependent  upon  pro- 
duction, and  is  considered  primarily  as  an  indirect  means  of  lower- 
ing the  general  expenses  of  domestic  labor  and  of  offsetting  the 
duties  of  the  neighboring  states.  This  constitutes  a  premium  of 
singular  efficacy  upon  exportation  and  we  must  in  justice  admit 
that  certain  of  our  competitors  understand  how  to  handle  it  with 
wonderful  skill. 

Upon  all  these  points  your  Commission  has  been  happy  to  find 
itself  in  agreement  with  the  Government,  which  in  its  statement  of 
the  motives  of  the  law  submitted  to  us,  has  so  conscientiously  ana- 
lyzed the  economic  evolution  which  is  taking  place  everywhere 
to-day,  and  set  forth  so  forcibly  our  need  of  adopting  measures  of 
preservation  for  the  defense  of  our  market. 

Burdens  which  Weigh  upon  French  Production 

To  these  general  reasons  drawn  from  the  economic  movements 
of  the  world,  which  would  suffice  to  justify  the  revision  of  the  duties 
of  i860,  there  must  be  added  another  which  has  arisen  since  that 
period,  one  peculiar  to  France,  and  upon  which  one  cannot  insist 
too  strongly ;  for  it  is  perhaps  that  which  weighs  most  heavily  upon 


REPORT  OF  THE  TARIFF  COMMISSION  323 

our  situation.  We  refer  to  the  increase  of  financial  burdens  of  every 
kind,  which  are  a  consequence  of  the  fatal  war  of  1870.  No  other 
country  is  laboring  under  burdens  so  heavy,  and  it  really  requires 
the  extraordinary  powers  of  labor  and  of  frugality  of  the  French 
race  to  keep  it  from  succumbing  under  such  a  load.  If  we  only 
consider  the  per  capita  charge  which  interest  on  the  public  debt 
places  on  the  inhabitants  of  the  principal  countries,  we  find  that  it 
is  only  4  francs  for  the  United  States  ;  for  Germany  7.50  francs ;  for 
Russia  10  francs;  for  England  16.25  francs;  while  for  France  it  is 
33.75  francs. 

The  annual  general  burden  is  no  less  heavy ;  if  we  confine  our- 
selves to  the  lowest  figures,  the  least  debatable  ones,  we  still  arrive 
at  the  conclusion  that  our  budget  of  general  expenses,  which  is 
three  and  a  half  billions,  imposes  upon  every  Frenchman  a  yearly 
burden  of  92  francs  (certainly  more  than  100  francs  if  one  includes 
the  local  debts),  while  for  Germany  the  burden  is  only  67  francs, 
for  Italy  60  francs,  for  Austria  54  francs,  for  the  United  States 
50  francs,  and  for  Belgium  41  francs. 

The  Hon.  M.  Pelletan,  who  has  made  such  a  conscientious  and 
profound  study  of  our  financial  situation,  effects  reductions  in  our 
budget  which  sensibly  reduce  its  amount ;  but  the  divergence  steadily 
remains  about  the  same,  to  the  detriment  of  France.  According  to 
him,  the  sum  paid  by  a  Frenchman  in  general  taxes  is  only  66  francs 
yearly ;  but  M.  Pelletan  calculates  that  that  burden  is  49.50  for 
the  Englishman  and  that  it  varies  for  the  other  countries  from  25 
to  45  francs. 

At  all  events,  the  expenditures  for  the  war  budget  alone  represent 
for  the  French  an  annual  impost  far  greater  than  that  of  any  other 
country.  To  the  pecuniary  tax  it  would  be  fair  to  add  the  burden, 
onerous  in  quite  another  way  to  French  production,  of  obligatory 
universal  military  service.  In  the  opinion  of  the  manufacturers  it  is 
through  that  circumstance  that  we  suffer  the  most  in  the  state  of 
armed  peace  which  is  crushing  the  principal  nations  of  Europe.  They 
are  unanimous  in  declaring  that  military  service,  by  taking  our 
workmen  in  mid-career  and  at  an  age  when  their  manual  skill  is 
most  remunerative,  inflicts  an  injury,  often  irreparable,  upon  their 
vocational  instruction.  It  is  thus  that  they  account  for  the  differ- 
ences of  accomplishment  which  our  English  or  Belgian  competitors 


324  MELINE 

attain  in  certain  callings.  Assuredly  our  workmen  are  inferior  to 
none  in  intelligence  and  industry,  and  they  should  not  be  held 
responsible  for  the  inevitable  consequences  occasioned  by  the  com- 
pulsory interruption  of  their  work.  This  is  an  additional  reason 
for  taking  account  of  them  in  establishing  our  customs  duties. 

Wages 

And  now  it  is  easy  to  calculate  for  every  branch  of  production  the 
increase  of  general  expenses  consequent  upon  our  financial  situation, 
and  the  special  disadvantage  which  it  inflicts  upon  our  producers 
as  compared  to  their  foreign  competitors.  As  was  inevitable,  it  is 
principally  in  wages  that  it  has  made  itself  felt ;  nearly  all  had  to 
be  raised  since  i860,  the  rise  in  certain  industries  mounting  as  high 
as  50  per  cent  and  even  higher.  And  as  a  general  thing  it  is  wages 
that  cause  the  principal  divergence  in  the  net  cost  of  like  French 
and  foreign  products.  You  will  find  this  demonstrated  on  every 
page  of  the  special  reports  relating  to  the  different  industries.  This 
cause  of  inferiority  weighs  upon  us  all  the  more  heavily  since  the 
products  in  which  we  excel  are  as  a  general  thing  those  in  which 
manual  labor  is  a  predominant  factor. 

What  we  have  to  defend  in  our  customs  duties,  therefore,  is 
manual  labor,  that  is  to  say,  the  labor  and  the  bread  of  our  work- 
men. Upon  the  aggregate  of  general  expenses  our  manufacturers 
have  made  the  maximum  possible  reduction ;  there  remains  only 
manual  labor  to  be  squeezed,  and  unfortunately  it  is  upon  this  that 
the  inadequacy  of  our  new  economic  regime  would  fall  with  fatal 
effect. 

It  cannot  enter  any  one's  mind  to  reduce  the  wages  of  our  work- 
men, which,  in  certain  branches  of  production,  are  manifestly  insuffi- 
cient. We  ought,  on  the  contrary,  to  strive  with  all  our  might  to 
raise  them,  and  there  is  only  one  way  to  do  it :  to  maintain  the 
prices  of  our  products  at  a  sufficiently  remunerative  rate  by  pre- 
venting their  excessive  reduction  through  foreign  competition.  Thus 
the  tariff  question  is  connected  with  the  social  problem  itself  in  its 
acutest  form. 

Let  us  take  heed,  moreover,  that  if  we  do  not  see  our  way  to  pay- 
ing our  workmen  well,  others  will  succeed  in  taking  them  from  us, 


REPORT  OF  THE  TARIFF  COMMISSION  325 

and  they  are  doing  so  already.  Everybody  knows  that  it  is  by  the 
employment  of  the  best  of  our  workmen  and  foremen  that  Russia, 
America,  Germany,  China  itself,  manufacture  to-day  choice  and 
tasteful  articles  of  which  we  have  hitherto  had  the  monopoly.  If 
this  movement  should  become  a  little  more  general,  we  ask  ourselves 
uneasily  what  may  become  before  long  of  our  artistic  supremacy. 

And  finally,  must  we  not  take  into  account,  if  we  wish  to  cover 
the  question  in  all  its  aspects,  the  numerous  laws  submitted  to-day 
to  the  consideration  of  the  Parliament,  having  for  their  object  the 
amelioration  of  the  condition  of  our  workmen ;  the  law  of  responsi- 
bility for  accidents,  of  pensions,  and  finally,  so  important,  the  one 
concerning  the  hours  of  labor,  which  in  reducing  the  working  day  for 
women  and  children  from  twelve  to  ten  hours  inevitably  leads  to  the 
same  reduction  for  men?  It  is  quite  evident  that  all  these  laws  if 
passed  will  constitute  a  heavy  burden  on  production.  Many  manu- 
facturers have  stated  to  your  Commission  that  for  the  majority  of 
the  industries  a  reduction  of  two  hours  of  work,  with  wages  un- 
altered, represented  in  net  cost  an  increase  of  more  than  20  per  cent, 
and  they  have  requested  that  the  tariff  rates  which  we  propose  to 
you  should  be  raised  accordingly. 

It  is  evidently  a  necessity  which  will  be  forced  upon  us  unless 
our  foreign  competitors  should  decide  to  follow  our  example  and 
reduce  their  hours  of  labor  to  the  same  extent  as  ourselves.  Bar- 
ring that,  the  reduction  of  working  hours  would  benefit  only  our 
rivals,  to  the  great  detriment  of  our  workers. 

We  believe  we  have  said  enough  to  establish  the  imperative  neces- 
sity of  the  revision  of  our  customs  duties  by  allowing  a  just  compen- 
sation for  French  as  compared  with  foreign  production.  We  do  not 
by  any  means  propose  for  this  purpose  to  return  to  the  regime  that 
preceded  i860,  advantageous  as  it  may  have  been  to  our  country; 
times  have  advanced  since  then,  the  conditions  of  production  have 
been  transformed,  many  of  our  industries  have  taken  a  new  direc- 
tion, and  to  overthrow  their  processes  from  top  to  bottom  would  be 
fraught  with  danger.  Nobody,  for  that  matter,  either  in  agriculture 
or  manufactures,  demands  such  an  extreme ;  there  is  no  longer  any 
question  to-day  of  prohibition,  or  even  of  an  immoderate  protection. 
The  French  producer  does  not  demand  any  privileges,  he  demands 
but  one  thing :  justice. 


32  6  MELINE 

He  claims,  as  it  is  his  right  to  do,  that  account  should  at  last  be 
taken  of  the  excessive  burdens  which  weigh  upon  his  work,  and  of 
the  causes  of  inferiority  whose  suppression  does  not  depend  upon 
him.  In  fixing  the  customs  duties,  he  demands  that  the  public 
authorities  should  estimate  exactly  the  divergence  which  differen- 
tiates him  from  his  foreign  competitor,  and  that  the  figure  set  down 
in  the  tariff  should  represent  that  divergence. 

Your  Commission  is  of  the  opinion  that  such  a  claim  is  absolutely 
legitimate,  and  it  is  upon  that  basis  that  it  has  tried  to  found  the 
very  difficult  work  which  you  confided  to  it.  It  has  sought  for 
every  branch  of  products,  whether  agricultural  or  manufacturing,  the 
exact  duty  which  seemed  to  it  indispensable  in  order  to  insure  their 
existence  and  free  development.  It,  like  the  Government,  considers 
that  to  invest  our  tariff  rates  with  a  real  value,  and  to  give  French 
production  courage  and  confidence,  the  first  essential  is  to  fix  the 
minimum  of  the  duty  which  will  be  assured  to  it,  no  matter  what 
happens — below  which  it  will  not  in  future  be  permitted  to  sink. 
It  is  upon  this  fundamental  principle  that  the  economics  of  our  tariff 
minimum  rests — it  is  this  which  determines  its  peculiar  character. 

Upon  this  first  point,  we  believe  we  have  given  our  producers  one 
of  the  greatest  satisfactions,  one  of  the  most  valuable  guarantees, 
to  which  they  could  aspire. 

There  is  another  of  no  less  importance,  and  which  has  since  i860 
been  the  object  of  an  incessant  claim  upon  public  attention. 

Equality  for  Agriculture  and  Manufactures 
At  that  period  people  were  not  intent  upon  apportioning  in  the 
tariff  to  each  of  our  manufactures  and  to  our  agriculture  the  just 
share  which  was  their  due  in  the  protection  of  the  nation's  labor. 
In  order  to  favor  the  exporting  manufactures  other  great  and  im- 
portant manufactures  were  sacrificed  which  had  a  right  to  live  and 
would  certainly  have  developed  if  they  had  not  been  delivered  over 
directly  to  a  crushing  competition.  It  is  no  mystery  to  any  one 
to-day  that  the  cotton,  flax,  and  carded-wool  manufactures,  and 
many  others  too  numerous  to  mention,  have  been  a  ransom  for  the 
others.  It  is  in  virtue  of  the  same  principle  that  agriculture  was  in 
like  manner  sacrificed  to  manufactures  by  putting  its  principal 
products  on  the  absolutely  free  list. 


REPORT  OF  THE  TARIFF  COMMISSION  327 

It  was  our  duty  to  repair  these  acts  of  gross  injustice.  Following 
a  point  of  view  different  from  that  of  the  negotiators  of  i860,  we 
believed  that  we  had  no  right  to  choose  between  the  various  branches 
of  labor,  to  prefer  one  to  another,  but  that  we  owed  them  all  equality 
of  treatment. 

The  preceding  Chambers  had  already  started  on  this  road  of 
reparation  by  abolishing  for  certain  products  the  crying  inequality 
of  which  agriculture  had  for  so  long  a  time  been  a  victim.  They 
ended  by  recognizing  that  all  those  products  which  are  the  fruit  of 
labor  have  a  right  to  equal  protection,  and  that  of  all  products  it  is 
those  of  the  soil,  if  there  should  be  a  choice,  which  ought  to  be  sacri- 
ficed the  least,  because  they  are  at  once  the  most  necessary  arid 
yield  the  most  to  the  country.  For  they  borrow  nothing  from  abroad 
and  are  pure  gain  for  the  public  wealth. 

We  could  not,  therefore,  hesitate  to  complete  the  work  of  the 
preceding  legislatures  by  granting  our  agricultural  production  a 
thoroughgoing  and  scientific  tariff.  We  were  all  the  more  obliged  to 
do  this  since,  besides  the  causes  of  inferiority  which  we  have  just 
analyzed,  and  which  apply  to  agriculture  as  well  as  to  manufactures, 
there  are  those  which  particularly  affect  our  agriculture  and  which 
are  daily  growing  more  menacing  to  its  future. 

These  causes,  which  have  brought  on  the  agricultural  crisis  which 
is  not  yet  over,  are  well  known  to-day,  and  no  one  thinks  any 
longer  of  denying  them. 

There  is  in  the  first  place  the  considerable  agricultural  devel- 
opment of  the  nations  of  Central  and  Western  Europe,  such  as 
Germany,  Austria-Hungary,  Russia,  Rumania,  whose  agricultural 
products  flow  into  our  markets  in  ever  increasing  volume ;  not  to 
speak  of  Italy  and  Spain,  whose  competition  has  become  so  formidable 
for  our  wines.  But  the  chief  of  these  causes  is  the  entrance  into  line 
in  the  markets  of  Europe  of  young  peoples  favored  by  nature  and  by 
their  financial  situation  with  exceptional  advantages :  a  virgin  soil, 
costing  next  to  nothing ;  for  certain  nations  labor  incredibly  cheap ; 
the  absence  of  military  imposts  and  the  insignificance  of  the  fiscal 
taxes.  In  i860  those  peoples  were  still  dormant,  and  it  is  this  cir- 
cumstance that  constitutes  an  excuse  for  the  statesmen  who  dis- 
dained to  take  precautions  to  insure  the  future  of  our  agricultural 
production.     America   was    still    so    far    off !     As    for    India    and 


32  8  MELINE 

Australia,  who  would  have  given  them  a  moment's  thought?  One 
hardly  thought  even  of  Russia. 

But  lo  and  behold,  all  of  a  sudden  the  development  of  the  means 
of  transportation  and  communication,  the  rapid  reduction  of  freight 
rates,  brought  those  great  markets  in  a  few  years  to  our  doors,  to 
such  an  extent  that  it  was  found  that  the  grains  of  America  and 
India,  landed  at  Havre  and  Marseilles,  could  be  had  at  lower  rates 
than  those  from  our  chief  centers  of  production.  After  grain,  it  is 
cattle,  even  cattle  on  the  hoof,  which,  thanks  to  ingenious  improve- 
ments in  the  construction  of  ships,  tend  to  be  substituted  for  French 
cattle ;  for  meats,  the  facilities  of  importation  are  still  greater. 

The  inevitable  consequence  of  this  movement  has  been  to  upset 
all  the  conditions  of  agricultural  production.  The  Government  rec- 
ognizes this  very  fully  when  it  declares  in  its  statement  of  reasons 
''that  it  tends  more  and  more  to  make  the  world  a  single  immense 
market  in  which  all  the  parts  are  jointly  responsible,  and  feel  directly 
the  repercussion  of  the  agricultural  and  industrial  crises  which 
occur  in  any  one  of  them." 

"Tt"  TV"  Tt"  TT  TT  TT  TT  TT  TT  TT 

Such,  in  their  totality,  are  the  general  views  which  have  actuated 
your  Commission ;  its  duty  was,  thus,  clearly  marked  out :  it  was 
to  recover  in  its  entirety  our  agricultural  production,  and,  doing 
what  should  have  been  done  in  i860  and  in  1881,  to  give  it  the 
same  place  in  our  customs  duties  that  is  given  to  the  other  branches 
of  production. 

But  if  it  was  easy  to  lay  down  the  rule  of  equality  and  justice,  it 
should  be  recognized  that  it  was  not  so  easy  to  apply  it.  Agriculture 
and  manufactures  are  not  separated  by  an  impassable  wall ;  there 
are  points  of  contact  between  them  where  their  interests  seem  to  run 
into  each  other  and  yet  cannot  be  blended  and  served  at  the  same 
time.  With  the  best  will  in  the  world  it  is  impossible,  on  those 
special  points,  to  give  to  them  equal  treatment :  a  choice  must  per- 
force be  made  and  a  preference  given  to  the  dominant  interest. 

It  should  in  justice  be  recognized  that  your  Commission  has  made 
the  most  serious  and  most  sincere  efforts  with  the  object  of  conciliat- 
ing them  in  the  greatest  possible  degree.  Its  reporter,  who  has  not 
always  agreed  with  it,  is  obliged  to  declare  that  it  has  never  lost 


REPORT  OF  THE  TARIFF  COMMISSION  329 

sight  of  the  rights  of  any  of  the  great  interests  of  the  country  and  that 
.  it  has  faithfully  sought  every  means  of  giving  them  satisfaction. 

How  it  was  led  to  maintain  the  free  entry  of  wool,  of  raw  hides, 
of  flax  and  silk,  despite  its  desire  to  grant  agriculture  the  same 
treatment  as  manufactures,  is  a  thing  which  it  is  important  to  state 
very  precisely.  For,  of  all  the  questions  which  it  has  had  to  solve, 
this  has  certainly  been  the  most  delicate,  the  most  difficult,  the  one 
which  has  agitated  it  the  most  and  caused  it  the  greatest  distress. 

Duties  on  Raw  Materials 

Let  us  remark  at  the  outset  that  the  majority  of  the  members  did 
not  for  a  moment  pause  at  a  consideration  formerly  so  potent,  that 
the  agricultural  products  in  question  were  raw  materials  and  should 
as  such  be  exempt  from  all  customs  imposts.  That  contention  is  re- 
nounced to-day  by  the  very  school  which  formerly  was  its  greatest 
advocate.  It  is  recognized  now  that  there  is  no  such  thing  as  raw 
material  in  the  absolute  sense  of  the  word,  that  everything  is  raw 
material  if  one  has  in  mind  the  successive  transformations  which  any 
product  whatever  may  undergo,  that  nothing  is  raw  material  when 
one  considers  that  all  products  which  are  the  fruit  of  labor  are  equal 
in  the  eye  of  the  tariff.  A  pound  of  wool  produced  by  the  husband- 
man, a  kilogram  of  cocoons  produced  by  the  sericulturist,  are  the 
results  of  a  human  labor  as  respectable  as  that  of  the  spinner  or 
weaver.  If  one  were  to  take  that  point  of  view  exclusively,  they 
should  all  receive  the  benefit  of  the  same  tariff  protection. 

The  best  proof  that  your  Commission  has  not  been  guided  by  the 
old  doctrine  of  raw  materials  is  that  it  has  not  hesitated  to  lay  duties 
on  oleaginous  seeds  and  on  hemp,  although  these  form  the  raw 
materials  of  a  number  of  great  industries. 

If  it  has  not  done  so  in  the  case  of  wool,  hides,  and  silk,  it  is 
because,  looking  at  the  matter  always  from  the  point  of  view  of  the 
development  of  the  nation's  labor,  which  was  its  objective. and  its 
chief  guiding  principle,  it  was  afraid  it  might  diminish  instead  of 
increase  it.  It  found  itself  confronted  by  manufactures  whose  ex- 
ports represent  almost  a  billion  francs,^  and  which  redound  to  the 

iWe  must  call  attention  to  the  fact  that  this  figure  represents  the  value  of 
the  products  exported,  and  by  no  means  that  of  the  French  production.  To 
estimate    the   latter,    we    should   have    to    deduct    from    the    amount    of    the 


330  MELINE 

honor  of  France.  The  high  duties  which  they  encounter  to-day  in 
all  the  markets  of  the  world  render  their  struggle  daily  more  difficult, 
and  it  is  obvious  that  if  the  price  of  their  raw  materials  were  raised 
by  the  imposition  of  a  duty  they  would  be  seriously  compromised. 

No  member  of  the  Commission  would  have  consented  to  it,  and 
the  question  was  not  even  brought  up  for  consideration.  The  most 
ardent  advocates  of  the  duties  have  always  asserted  that  they 
demanded  them  only  under  the  express  provision  that  they  would 
be  returned,  on  exportation  of  the  products,  in  the  form  of  a  draw- 
back ;  there  is  no  doubt  that  if  that  condition  could  have  been  met, 
those  duties  would  have  been  voted  by  a  large  majority. 

Upon  such  a  purely  technical  question  it  was  not  the  province  of 
your  Commission  to  be  the  sole  ones  to  pass  an  opinion,  and  to 
impose  their  will.  It  was  absolutely  necessary  to  consult  the  Gov- 
ernment and  make  sure  of  its  cooperation,  since  it  is  the  Govern- 
ment which  is  charged  in  practice  with  applying  and  carrying  out 
a  system  of  restitution,  of  whatever  nature. 

The  declarations  of  the  Government  upon  this  capital  point  have 
been  most  explicit.  It  rejected  in  the  most  positive  manner  the  two 
schemes  hitherto  in  use  under  the  name  of  temporary  admission  or 
of  drawback ;  temporary  admission  ^  as  a  means  at  once  inadequate 
and  dangerous  for  our  domestic  market  itself ;  the  drawback  as 
ruinous  to  the  Treasury  and  impossible  in  practice. 

It  has  especially  insisted  upon  taking  account  of  the  industrial 
transformation  which  has  taken  place  in  the  textile  industries  in  the 
last  twenty  years,  and  which  tends  more  and  more  to  substitute 
mixed  for  pure  fabrics.  The  difficulty  of  ascertaining  the  weight, 
quality,  proportion,  of  the  various  textiles  appears  to  it  insur- 
mountable. Their  verification  would,  in  its  estimation,  present 
such  difficulties,  be  so  uncertain,  would  entail  such  delays,  that  the 
export  trade  would   be  paralyzed. 

I  will  not  go  so  far  as  to  say  that  these  objections,  presented  with 
great  force  by  the  Minister  of  Commerce,  convinced  all  the  members 

exportations  the  sum  total  of  foreigrn  raw  materials  which  entered  into  them 
and  which,  for  wool  and  silk  alone,  represent  several  hundred  million  francs. 

^Admission  teviporaire,  an  arrangement  whereby  materials  were  admitted  free 
of  duty  if  to  be  worked  up  in  some  way  and  reexported  within  a  specified 
period.  (Ed.) 


REPORT  OF  THE  TARIFF  COMMISSION  331 

of  the  majority  of  your  Commission.  Many  of  them  persist  in  think- 
ing that  a  system  which  was  in  operation  until  i860  is  by  no  means 
an  impossible  one ;  if  in  practice  it  involved  some  inevitable  incon- 
veniences, it  does  not  by  any  means  seem  to  them  impossible  to 
have  these  corrected.  They  point  out,  finally,  that  if  manufacturing 
has  been  transformed,  if  the  mixture  of  textiles  has  come  into  general 
use,  science,  too,  has  made  advances,  which  enable  it  to  recognize 
rapidly  and  surely  the  composition  of  a  product ;  chemistry  has 
solved  problems  far  more  difficult.  It  solves  them,  for  that  matter, 
every  day  in  carrying  out  the  regulation  of  temporary  admission 
itself. 

So  far  as  the  silk  industry  is  concerned,  for  example,  which  enjoys 
the  privilege  of  temporary  admission,  is  it  not  demonstrated  that  it 
can  work  that  system?  How  can  one  understand  that  the  cotton 
threads  which  enter  into  the  composition  of  a  fabric  mixed  with 
silk  can  be  recognized  while  the  silk  threads  cannot? 

Excellent  as  these  reasons  may  be,  they  did  not  suffice  to  win 
over  the  majority  of  your  Commission.  It  seemed  to  it  too  daring 
a  thing  to  launch  out  alone,  and  without  the  support  of  the  Govern- 
ment, into  an  experiment  which  the  latter  condemned  in  advance ; 
it  recoiled  before  a  responsibility  which  might  entail  such  serious 
consequences.  In  order  to  succeed  in  a  matter  of  this  nature,  it  does 
not  suffice  to  have  the  forced  acquiescence  of  the  Government ;  what 
is  necessary  is  its  convinced  concurrence ;  success  can  be  attained 
only  at  that  price. 

Such  is  the  chief  reason  which  dictated  the  vote  of  your  Commis- 
sion upon  this  important  question.  It  could  not  think  of  compro- 
mising great  and  powerful  industries,  such  as  the  woolen,  leather, 
and  silk  industries.  It  could  do  so  all  the  less  since  in  striking 
them  it  ran  the  risk  of  striking  agriculture  itself. 

We  must  not  forget  that  the  exported  textiles  contain  a  definite 
proportion  of  raw  materials  of  French  origin ;  French  wool  and  silk 
serve  as  a  vehicle  for  foreign  wool  and  silk.  Every  diminution  in  our 
exports  would,  therefore,  result  in  a  diminution  of  the  use  of  French 
agricultural  products  themselves.  Agriculturists,  for  that  matter, 
are  aware  that  those  engaged  in  manufacturing  are  their  best  cus- 
tomers, and  that  the  consuming  capacity  of  the  latter  increases  with 
the  prosperity  of  our  manufactures. 


332  MELINE 

In  conclusion,  there  is  a  final  reason  which  mitigated  the  regret 
felt  by  the  defenders  of  agriculture  in  being  unable  to  give  direct 
protection  to  wool  and  hides ;  it  is  the  possibility  offered  by  a  revi- 
sion of  our  tariff  of  protecting  them  indirectly  by  raising  the  duties 
upon  sheep  and  cattle,  and  above  all  upon  meats. 

Many  noted  agriculturists  go  so  far  as  to  believe  that  these  duties 
are  more  effective  than  the  duties  on  wool  and  hides,  because  their 
reaction  upon  the  value  of  the  product  is  a  sure  thing.  They  point 
out  that  a  duty  on  wool  and  hides  would  not  necessarily  augment 
by  its  amount  the  price  of  our  wool  and  hides,  because  the  foreign 
wool  and  hides  imported  into  our  country  are  of  a  different  nature 
from  the  French  wool  and  hides  and  are  very  often  applied  to 
different  uses,  while  live-stock  has  a  value  and  use  that  is  the  same 
in  all  countries. 

We  could  not,  unfortunately,  offer  a  like  consolation  to  our  flax 
growers  and  our  sericulturists,  and  it  is  this  circumstance  that  your 
Commission  so  deeply  regrets.  It  would  certainly  have  placed  a 
duty  on  foreign  flax  if  it  had  not  been  impossible  for  it  to  do  so  on 
account  of  the  free  admission  of  wool.  In  order  to  put  a  duty  on 
flax  it  would  have  been  absolutely  necessary  to  put  one  on  cotton, 
whose  products  compete  with  those  of  flax  in  our  domestic  market ; 
and  it  was  impossible  to  put  a  duty  on  cotton  and  flax  without 
giving  woolen  textiles  a  privileged  position  which  would  have  consti- 
tuted a  clear  injustice. 

Bounties  on  the  Cultivation  of  Flax  and  on  Sericulture 

Several  members  of  the  Commission,  distressed  at  the  thought  of 
the  compulsory  abandonment  of  the  great  flax  industry,  which  was 
formerly  so  flourishing,  and  so  profitable  to  our  agriculture,  asked 
themselves  whether  there  was  not,  as  in  the  case  of  hides  and  wool, 
an  indirect  means  of  coming  to  its  assistance.  They  thought  that 
by  encouraging  our  cultivators  by  premiums  on  the  production  of  a 
flax  of  medium  quality  and  abundant  yield,  they  could  be  put  into 
a  position  to  recover  a  portion  of  our  market  and  to  meet  during 
this  transformation  the  efforts  of  foreign  competition. 

With  this  in  view  they  addressed  a  petition,  which  was  approved 
by  the  Commission,  to  the  Government  asking  that  it  should  seek 


REPORT  OF  THE  TARIFF  COMMISSION  333 

means  of  realizing  the  object.  This  does  not  by  any  means  seem 
impossible  if  we  judge  by  some  experiments  of  the  same  kind.  For 
some  years  a  Committee  on  Flax  in  the  Department  of  the  North 
has  been  distributing  annual  prizes  to  the  flax  growers,  which  have 
already  yielded  excellent  results.  Our  neighbors  across  the  Channel 
have  long  given  us  an  example  of  the  same  sort ;  it  is  by  bounties 
that  the  English  Government  has  supported  for  fifty  years  in  Ireland 
the  production  of  flax,  which  to-day  has  attained  a  perfection  so 
well  known. 

The  interposition  of  the  state  would  be  all  the  more  opportune 
since  in  the  tariff  on  linen  fabrics  and  yarn  we  have  raised  the  duties 
on  the  fine  yarns  and  fabrics,  which  had  been  wholly  sacrificed,  and 
since  the  use  of  the  fine  grades  of  flax,  so  well  adapted  to  French 
soil,  cannot  fail  to  be  extended. 

This  order  of  ideas  is  not  calculated  to  displease  the  Government, 
for  it  has  itself  pursued  the  same  direction  in  proposing  a  bill  in- 
tended to  secure  bounties  for  sericulture  to  take  the  place  of  the 
protective  duty  which  was  denied  it.  This  bill  having  been  sent  to 
the  Budget  Committee,  your  Commission  on  duties  was  not  called 
upon  to  examine  it  directly.  No  one  can  tell  what  it  would  have 
done  with  it  if  it  had  had  to  pronounce  upon  it,  or,  consequently, 
what  transformations  it  might  have  caused  it  to  undergo. 

The  problem  is  a  subsidiary  one  which  remains  open  to  discussion 
and  which  will  assuredly  give  rise  to  a  searching  debate  in  the 
Chamber.  It  is  all  the  more  important  since  it  may  henceforth  be 
regarded  as  certain  that  many  convinced  advocates  of  sericulture 
will  without  hesitation  grant  it  the  duties  which  it  demands,  if  no 
other  efficacious  means  are  found  to  give  it  satisfaction.^ 

Agricultural  Duties 

We  have  sought  to  present  as  accurately  as  possible  the  chief 
reasons  which  prompted  the  resolutions  of  your  Commission  upon 
one  of  the  most  difficult  questions  it  had  to  solve  in  agricultural 
matters.  That  question  settled,  it  easily  agreed  upon  all  the  others, 
and  it  has  allowed  to  our  agricultural  production  as  a  whole  the 

^The  tariff  of  1892  as  finally  passed  did  include  bounties  on  the  production 
of  raw  silk.  (Ed.) 


334  MELINE 

just  protection  to  which  it  has  been  entitled  for  a  long  time,  and 
which  the  treaties  alone  have  prevented  it  during  these  last  years 
from  obtaining.  Duties  are  raised  on  a  great  number  of  agricultural 
products,  such  as  live-stock,  and  particularly  meats,  cheese,  wines, 
beer,  fish,  oils,  hops,  etc.,  etc. 

New  duties  are  imposed  on  a  great  number  of  products  which  are 
allowed  free  admission  by  our  conventional  tariff  regulations.  Let 
us  mention  butter,  oleomargarine,  eggs,  milk,  poultry,  lard,  honey, 
wax,  fodder,  fresh  and  dried  vegetables,  grapes  and  apples,  hemp, 
oleaginous  grains,  brans,  and,  finally,  wood,  that  product  so  impor- 
tant for  our  country  and  which  is  such  a  valuable  source  of  income 
for  the  budget  of  the  state. 

If  the  Parliament  ratifies  these  propositions,  which  we  confidently 
hope,  agricultural  France  will  soon  feel  their  beneficial  effects ;  we 
shall  soon  see  the  revival  and  development  of  a  great  number  of 
agricultural  activities  which  have  been  discouraged  by  foreign  com- 
petition and  which  ask  only  the  possibility  of  living. 

However,  some  of  the  agricultural  societies  do  not  feel  satisfied, 
and  urge  that  more  could  have  been  done ;  they  complain,  above  all, 
that  manufactured  products  have  been  granted  an  amount  of  pro- 
tection greater  than  that  accorded  to  those  of  agriculture.  The  agri- 
cultural protection,  they  say,  averages  only  from  lo  to  25  per  cent 
of  the  value  of  the  articles,  while  the  protection  of  manufactures 
ranges  from  25  to  60  per  cent. 

To  these  objections  and  criticisms  we  shall  reply  by  pointing  out, 
firstly,  that  if  one  wishes  to  judge  of  an  undertaking  so  considerable 
as  that  of  framing  an  agricultural  tariff  applicable  to  the  whole  of 
French  agriculture  it  is  not  sufficient  to  single  out  some  isolated 
points  and  complain  of  not  having  obtained  everything. 

It  is  necessary  to  consider  what  has  been  obtained,  the  whole 
scheme  of  the  duties  enacted,  and  compare  them  with  the  importance 
of  the  branches  of  labor  which  are  to  be  protected ;  only  thus  can 
we  understand  their  operation  and  estimate  their  beneficial  effect 
upon  the  national  production. 

Now,  if  one  takes  the  figures  of  the  most  exacting  advocates  of 
agriculture,  who  reckon  the  annual  agricultural  production  at  25  bil- 
lion francs,  and  analyzes  these  figures  by  applying  to  each  article 
the  duties  voted  by   the   Commission,  one   finds   that   more   than 


REPORT  OF  THE  TARIFF  COMMISSION  335 

21  billions'  worth  of  agricultural  products  are  henceforth  going  to  be 
protected.  And,  moreover,  from  the  four  billions  remaining  we 
should  subtract  nearly  two  billions'  worth  upon  which  agriculture 
does  not  demand  any  protection  (straw,  manure,  tobacco,  etc.). 

Finally,  it  should  be  observed  that  if  not  all  the  agricultural 
■products  are  protected — if  some,  to  the  regret  of  your  Commission, 
had  to  be  excepted — it  is  no  less  true  that  after  the  vote  upon  our 
tariffs  there  will  not  be  a  single  agricultural  industry  in  France  that 
will  not  have  a  share  of  protection ;  for  there  is  not  a  single  one 
which,  through  the  inevitable  variety  of  its  productions,  will  not  be 
in  line  to  profit  by  it. 

As  for  the  existing  difference  between  the  proportion  of  duties, 
according  as  they  are  applied  to  agriculture  or  to  manufactures,  this 
is  an  easy  thing  to  explain  and  to  justify.  It  is  a  consequence  of  the 
nature  of  things  and  does  not  impair  the  rights  of  anyone.  If  the 
taxes  imposed  upon  agricultural  products  seem  in  general  lower  than 
those  that  protect  certain  manufactured  ones,  it  is  because  they  are 
levied  upon  a  product  that  is  simple  and  has  not  as  yet  undergone 
any  transformation ;  thus  it  gets  the  entire  benefit  of  the  duty.  The 
duties  on  wheat,  corn,  wood,  hemp,  oil,  live-stock,  oleaginous  seeds, 
go  entirely  to  agricultural  production.  But  when  these  products  are 
transformed  by  manufacture,  it  is  absolutely  necessary  that  the  duty 
granted  should  be  higher,  lest  it  get  nothing ;  when  the  manufacturer 
transforms  wheat  or  corn  into  starch  and  farina,  when  he  transforms 
wood  into  furniture,  oleaginous  seeds  into  oil,  he  begins  by  paying, 
on  the  wheat,  the  corn,  the  oleaginous  seeds  that  he  buys,  the  duties 
granted  to  agriculture,  and  it  is  the  part  of  justice  that  that  should  be 
taken  into  account.  The  duty  that  protects  him  represents  only  the 
difference  which  constitutes  his  special  protection. 

As  to  the  total  duty,  great  as  it  may  be,  it  protects  agriculture  as 
much  as  manufactures,  since,  if  manufacturing  industry  were 
crushed  by  foreign  competition,  it  would  be  unable  to  buy  French 
agricultural  products.  When  the  starch  and  farina  industries  prove 
unsuccessful,  it  is  wheat  and  potatoes  that  suffer ;  when  foreign 
sugar  invaded  our  market,  the  culture  of  the  beet  languished. 

What  we  say  about  agriculture  in  its  relation  to  manufactures  is 
equally  applicable  to  the  various  manufacturing  industries  when 
compared  with  each  other.    That  which  is  concerned  with  the  earliest 


336  MELINE 

stages  of  production  is  as  a  general  thing  very  moderately  protected ; 
those  which  come  last  in  the  series  of  transformations  seem,  on  the 
contrary,  to  enjoy  exorbitant  duties ;  but  that  is  only  apparently 
true. 

In  the  textile  industries,  for  example,  spinning  gets  an  average 
protection  of  only  12  per  cent  for  the  numbers  most  used ;  but  when 
we  pass  from  the  thread  to  the  unbleached  cloth,  from  the  un- 
bleached to  the  dyed  or  printed  cloth,  from  the  dyed  or  printed  cloth 
to  the  finished  garment,  when  each  one  of  these  processes  of  manu- 
factures has  been  allowed  its  due  share,  it  is  obvious  that  the  last 
duty,  which  embraces  all  the  others,  is  necessarily  very  high ;  but  it 
will  be  seen  by  what  we  have  just  said  that  it  would  be  a  serious 
error  to  believe  that  it  benefits  the  industry  concerned  exclusively. 

Observation  is  of  prime  importance  in  the  matter  of  the  tariff ; 
it  replies  in  advance  to  the  objection  so  often  repeated,  and  so  in- 
accurate, that  the  duties  voted  by  your  Commission  are  exorbitant 
and  prohibitive. 

Your  Commission  may,  therefore,  justly  claim  that  in  its  fixing 
of  the  duties  it  applied  the  same  principles  to  agriculture  as  to 
manufactures,  and  that  it  held  the  balance  even  between  all  French 
workers.  Upon  that  point  there  never  has  been  a  shadow  of  dif- 
ference among  its  members ;  they  were  so  thoroughly  convinced  of 
the  intimate  solidarity  which  unites  the  two  great  branches  of  our 
national  production  that  it  never  for  a  single  moment  entered  their 
minds  to  establish  a  difference,  or  even  a  shade  of  difference,  between 
the  one  and  the  other. 

Duties  on  Manufactures 

After  the  agricultural  tariff  it  remains  to  examine  the  lines  of  our 
tariff  on  manufactures  and  to  acquaint  you  with  the  general  ideas 
which  led  to  their  revision.  In  the  case  of  agriculture,  it  was  the 
first  time  that  its  situation  was  examined  throughout  from  the  point 
of  view  of  customs  protection,  and  your  Commission  had,  in  a  way, 
everything  to  do.  As  regards  manufactures,  the  situation  was  very 
different;  since  i860  the  duties  which  govern  them  have  been  the 
subject  of  ceaseless  discussion,  and  the  truth  has  come  out  on  every 
hand.    It  is  recognized  now  that  the  fundamental  evil  of  the  treaties 


REPORT  OF  THE  TARIFF  COMMISSION  337 

of  i860  was  the  unequal  treatment  of  the  different  industries ; 
certain  ones  have  been  adequately  protected,  some  even  liberally  so  ; 
others  have  been  wholly  sacrificed.  In  the  first  rank  of  the  latter 
we  must  place  the  cotton  industry,  the  linen  industry,  that  of 
carded  wool. 

It  was  the  chief  care  of  your  Commission  to  give  these  great 
industries  their  due.  It  is  upon  them  that  the  duties  have  been 
increased  the  most ;  but  it  is  evident  that  these  increases  are  justified. 

Some  of  these  increases  are  merety  a  correction  of  purely  material 
errors  in  the  assessment  and  calculation  of  the  duties.  Thus  the 
tariff  on  embroideries  was  fixed  in  such  a  way  that  the  duty  on 
embroidered  cloth  was  in  many  cases  lower  than  that  on  the  plain 
cloth  upon  which  the  embroidery  was  applied,  so  that  the  importer 
needed  only  to  dab  a  bit  of  embroidery  on  the  plain  cloth  in  order 
to  escape  the  payment  of  duty  on  the  embroidery  and  a  part  of  the 
duty  on  the  cloth.  In  the  case  of  oilcloths  and  rubber  goods  we  have 
discovered  like  anomalies. 

But  there  is  another  point  in  our  work  of  revision  to  which  it  is 
important  to  call  attention,  because  it  is  perhaps  the  one  which  has 
exacted  the  most  considerable  labor  on  the  part  of  your  Commission. 
Since  i860,  and  particularly  since  1881,  a  great  transformation,  and 
one  which  is  accentuated  every  day,  has  taken  place  in  the  course 
and  development  of  the  various  industries.  The  advances  of  science 
are  constantly  modifying  the  processes  of  manufacture,  substituting 
one  product  for  another  and  creating  new  industries  of  whose  exist- 
ence there  was  no  indication  a  few  years  ago.  It  is  to  this  new 
state  of  things  that  it  was  requisite  to  adapt  our  new  tariff ;  hence 
the  necessity  of  new  duties,  the  alteration  of  old  ones,  and,  above  all, 
a  complete  change  of  classification. 

As  a  consequence  our  tariff  will  necessarily  appear  more  compli- 
cated than  the  old  one ;  but  it  was  an  inevitable  complication.  You 
will  recognize  in  it  a  proof  of  the  conscientious  care  which  your  Com- 
mission has  brought  to  bear  upon  its  work. 

The  change  of  classifications  has  in  many  instances  resulted  in 
raising  certain  duties ;  but  it  should  in  justice  be  pointed  out  that 
others  have  been  lowered,  and  it  is  the  total  amount,  the  average 
of  the  duties,  that  we  must  take  into  consideration,  if  we  wish  to 
obtain  an  exact  estimate  of  the  actual  result  of  our  new  tariffs. 


:^i8  MELINE 

You  know  now  in  what  spirit  and  by  what  processes  your  Com- 
mission decided  to  settle  upon  the  minimum  tariff  requisite  for  the 
protection  of  our  agriculture  and  our  manufactures.  We  have  thus 
affirmed  the  intimate  solidarity  of  all  the  branches  of  our  national 
production,  and  we  hope  that  the  Chamber  will  be  as  deeply  im- 
pressed with  it  as  ourselves ;  the  success  of  the  work  which  we  are 
undertaking  depends  upon  it.  The  feeling  of  that  solidarity  is  very 
vivid  to-day  in  the  working  masses.  Their  sound  sense  and  their 
spirit  of  justice  are  repelled  by  inconsistencies  and  selfish  calcula- 
tions. They  do  not  admit  that  one  should  be  protectionist  for  one's 
self  and  free  trader  for  others,  and  fail  entirely  to  understand  the 
language  of  the  representatives  of  certain  Chambers  of  Commerce 
who  demand  high  duties  for  certain  industries,  and  yet  constantly 
insist  that  the  economic  policy  of  France  is  being  turned  into  a 
deplorable  course.  If  one  wishes  to  assume  such  an  arrogant  atti- 
tude one  should  at  least  be  logical  and  carry  out  one's  theory  to 
its  full  extent. 

Application  of  the  Double  Tariff 

There  remains  still  for  us  to  explain  to  you  the  resolutions  of  your 
Commission  regarding  the  application  of  our  minimum  tariffs  to 
foreign  countries ;  we  come  thus  to  the  very  important  question  of 
the  actual  working  of  our  new  economic  system. 

The  Government  proposed  to  us  that  we  attack  the  problem  by 
the  adoption  of  a  double  tariff;  a  minimum  tariff  and  a  higher 
general  tariff  which  would  be  based  upon  a  variable  augmentation  of 
the  figures  of  the  minimum  tariff.  The  general  tariff  would  be  our 
common  tariff,  applicable  in  principle  to  everybody.  As  for  the 
minimum  tariff,  it  would  constitute  a  tariff  of  favor  which  would 
be  conceded  to  the  nations  which  would  accord  to  us  corresponding 
advantages,  and  particularly  to  those  which  would  allow  us  to  get 
the  benefit  in  their  markets  of  the  same  advantages  as  our  foreign 
competitors — that  is  to  say,  those  that  would  treat  us  on  the  level 
of  the  most  favored  nation.^ 

'  Wc  do  not  consider  in  the  series  of  possible  combinations  that  of  a  tariff 
intermediate  between  the  general  and  the  minimum  tariff,  because  it  seems  to 
belong  to  the  domain  of  pure  theory.  The  Government  itself  has  recognized 
this;  it  has  declared  to  us  that  while  reserving  to  itself  the  right  to  resort,  if 


REPORT  OF  THE  TARIFF  COMMISSION  339 

A  question  of  great  importance  was  that  of  determining  in  what 
shape,  for  what  length  of  time,  and  subject  to  what  conditions  the 
minimum  tariff  could  be  granted  to  any  country.  Was  it  to  be  by 
means  of  a  genuine  treaty ;  that  is,  by  reciprocal  agreements  binding 
the  two  parties  and  establishing  in  an  irrevocable  manner,  pending 
their  duration,  the  rates  of  that  tariff?  Should  it  not,  on  the  con- 
trary, be  granted  as  a  simple  reduction  of  the  general  tariff,  but  a 
reduction  which  we  should  be  empowered  to  modify  at  will,  if  the 
necessity  for  such  action  were  demonstrated  to  us? 

Upon  this  capital  point  the  Government  expressed  the  desire  to 
reserve  to  itself  its  liberty  of  action  and  decision.  It  declared  to  us 
that  in  its  opinion  the  time  had  not  yet  come  to  say  that  it  abso- 
lutely renounced  the  principle  of  the  treaties.  It  expressed  itself 
formally  only  upon  one  point ;  and  that  is  that  if  treaties  were  ever 
entered  into,  the  concessions  made  to  foreigners  should  never  fall 
below  the  figures  of  the  minimum  tariff.  It  admitted,  for  the  rest, 
that  it  would  be  expedient  to  except  from  those  treaties  the  duty  on 
cereals  and  on  live-stock. 

It  is  the  whole  body  of  these  declarations  that  we  are  going  to 
pass  in  review,  acquainting  you  in  the  case  of  each  with  the  opinion 
of  your  Commission. 

Single  Tariff 

And,  in  the  first  place,  it  adopted  without  hesitation  the  principle 
of  the  double  tariff,  which  seemed  to  it  particularly  adapted  to  those 
who  are  opposed  to  treaties.  No  one,  it  should  be  mentioned,  sug- 
gested a  single  tariff  applicable  to  the  world  at  large  without  distinc- 
tion. That  absolute  system  presents,  in  fact,  obvious  disadvantages 
and  dangers.  The  first  of  these  disadvantages  would  be  the  forcing 
of  the  protective  idea  beyond  measure,  as  all  the  nations  that  have 
adopted  that  system  have  done.  When  the  same  tariff  is  applied  to 
all,  that  is,  even  to  the  countries  which  have  a  really  prohibitive 
system,  the  natural  result  is  a  great  increase  of  tariff  rates.  That 
is  a  road  upon  which  we  do  not  wish  France  to  enter. 

expedient,  to  that  mode  of  action,  it  realized  that  it  would  be  a  difficult  matter 
to  have  it  accepted  by  any  country.  It  is  probable  that  all  of  them  would 
either  demand  the  minimum  tariff  or  resign  themselves  to  submit  to  the  general 
tariff. 


340 


MELINE 


But  the  single  tariff  would  have  a  defect  far  more  serious,  that  of 
compromising  the  interests  of  our  export  trade,  which  we  purpose  to 
protect  by  every  means  in  our  power.  The  single  tariff  would  cause 
us  to  lose  the  benefit  of  the  concessions  which  we  can  expect  in 
offering  our  minimum  tariff,  and  especially  the  advantages  which 
our  competitors  might  gain  in  foreign  markets — that  is,  the  treat- 
ment of  the  most  favored  nation.  If  we  exclude  ourselves  from  the 
possibility  of  granting  favors  to  others,  what  right  have  we  to  de- 
mand any  from  them? 

It  is  true  that  the  reply  is  made  that  the  single  tariff  would  not 
exclude  measures  of  reprisal  against  nations  which  would  be  tempted 
to  inflict  a  rigorous  treatment  upon  our  products,  and  that  the 
menace  of  such  reprisals  sufficed  to  secure  to  certain  nations  which 
have  the  single  tariff  the  tariff  of  the  most  favored  nation.  But  is 
not  this,  by  the  admission  of  the  advocates  of  the  single  tariff  them- 
selves, a  condemnation  of  that  very  system? 

The  policy  of  reprisals  is  the  most  dangerous  of  all :  it  should  not 
be  resorted  to  except  in  case  of  the  utmost  extremity ;  one  never 
knows  where  it  may  lead  or  what  it  may  cost,  and  it  may  well  be 
conceded  to  us  that  the  method  that  can  without  reprisals  accom- 
plish the  desired  end  and  protect  our  export  trade  is  incontestably 
superior  to  all  others. 

So  our  Commission  espoused  without  hesitation  the  principle  of 
the  double  tariff.  It  agrees  with  the  Government  in  holding  that 
the  general  tariff  should  constitute  the  common  duty  applicable  to 
all,  and  that  the  minimum  tariff  should  not  be  conceded  to  the 
foreigner  except  under  certain  forms  and  conditions. 

As  for  the  form,  there  are  only  two  means  of  making  the  conces- 
sion :  either  a  law  which  binds  only  ourselves  or  an  agreement  which 
binds  equally  those  with  whom  it  is  entered  into.  We  have  already 
practiced  both  systems ;  it  is  only  by  a  law  that  we  conceded  to 
England,  and  quite  recently  to  Greece,  the  benefit  of  our  contractual 
tariffs.  It  is  by  special  conventions  that  we  have  accorded  the 
most-favored  nation  treatment  to  other  countries,  such  as  Austria- 
Hungary,  Turkey,  INIexico. 

But  besides  these  conventions,  which  embrace  only  a  pledge  of 
principle  and  of  relative  favor,  the  consequences  of  which  may  be 
varied  by  the  contracting  parties,  there  are  others  whose  aim  it  is 


REPORT  OF  THE  TARIFF  COMMISSION  341 

to  bind  in  close  union  the  nations  that  sign  them,  by  fixing  for  their 
entire  duration,  in  an  immutable  fashion,  the  customs  system  of  the 
contracting  countries.  These  conventions  are  termed  treaties.  The 
distinctive  character  of  the  treaties  consists  in  the  embodiment  in 
their  text  of  the  sum  total  of  the  tariffs  concerning  the  entire  pro- 
duction of  the  contracting  nations,  and  in  the  pledge  of  leaving  them 
untouched  pending  their  entire  duration. 

There  are,  then,  two  possible  ways  of  granting  the  minimum  tariff 
in  the  form  of  a  convention.  It  may  be  conceded  as  a  simple  treat- 
ment of  favor  under  the  general  tariff,  but  without  taking  any  pledge 
to  maintain  its  figures  indefinitely.  In  that  case  the  result  of  the 
convention  does  not  sensibly  differ  from  that  of  the  law.  To  con- 
cede our  minimum  tariff  by  a  convention  of  that  kind  is  only  to 
promise  to  the  nation  to  which  we  grant  the  concession  our  lowest 
tariff  rate ;  but  we  owe  it  nothing  more  and  we  retain  the  power  to 
alter  and  raise  the  actual  figures  of  that  tariff  should  the  necessity 
for  such  action  be  demonstrated  to  us.  In  short,  we  promise  only 
one  thing ;  that  is,  never  to  apply  our  general  tariff  pending  the 
duration  of  the  convention  to  the  nation  with  which  we  have  made 
that  agreement. 

There  is  a  second  way  of  according  our  minimum  tariff,  and  that 
is  by  incorporating  it  in  a  genuine  treaty  and  thus  fixing  the  figures 
for  the  entire  duration  of  the  treaty.  In  this  system,  the  minimum 
tariff  would  take  the  place  of  our  actual  contractual  tariffs,  with  the 
sole  difference  that  it  would  be  applied  en  bloc  while  our  contractual 
tariffs  have  been  formed  by  sections  and  by  successive  layers. 

System  of  Treaties 

Confronted  with  these  two  systems,  your  Commission  decided,  by 
a  very  large  majority,  that  if  the  first  was  considered  acceptable,  the 
second  should  henceforth  be  abandoned.^  It  was  of  the  opinion  that 
the  interest  of  our  country  commanded  it  not  to  enter  into  any 
more  treaties  and  to  remain  master  of  its  tariff.    It  seemed  to  it 

^It  goes  without  saying  that  the  Commission  acted  here  only  by  way  of 
advice  and  counsel,  and  that  it  in  no  v/ise  intended  to  infringe  upon  the  pre- 
rogative bestowed  by  the  Constitution  upon  the  Government  of  making  treaties 
under  its  responsibility,  conditional  upon  submitting  them  to  the  ratification 
of  the  Parliament. 


342  MELINE 

that  the  economic  situation  of  the  world  imposed  that  measure 
of  prudence  upon  us  more  than  upon  others.  We  have  for  ten  years 
been  witnessing  a  general  revolution  in  the  conditions  of  production, 
and  the  respective  situation  of  the  various  nations  is  constantly 
being  modified  with  a  dizzying  rapidity.  One  that  amounted  to 
nothing  yesterday  is  all  of  a  sudden  revealed  as  a  formidable  agri- 
cultural or  industrial  rival ;  a  few  years  may  enable  it  to  crush  all 
its  competitors.  There  was  a  time  when  distance,  the  difficulty  of 
communication,  and  the  high  rates  of  transportation  were,  for  the 
majority  of  nations,  particularly  those  of  Europe,  a  bulwark  more 
efficacious  than  customs  duties.  To-day  that  advantage  is  denied 
them  and  everything  is  against  them.  Who  would  dare  to  assert 
that  matters  will  stop  here  and  that  the  future  holds  no  new 
surprises  for  us? 

One  must  bow  to  the  force  of  circumstances  and  recognize  that 
to-day  all  the  markets  tend  more  and  more  to  draw  near  to  each 
other,  and  that  the  distance  which  separates  them  will  steadily  keep 
on  diminishing. 

It  is,  therefore,  the  struggle  of  the  strongest  against  the  weakest 
that  is  beginning,  and  we  must  prepare  to  sustain  it  without  discour- 
agement but  likewise  without  illusion.  We  must  be  ready  for  every- 
thing, ready,  consequently,  to  recast  our  economic  system  should 
new  dangers,  impossible  to  foresee  to-day,  menace  our  national 
production.  We  may  hope  that  such  a  necessity  will  not  make  itself 
felt  for  a  long  time  to  come,  but  it  would  be  most  presumptuous  not 
to  take  it  into  account. 

Even  should  the  precaution  be  needless,  it  would,  in  any  case, 
have  the  advantage  of  reassuring  our  producers,  of  giving  them  a 
feeling  of  security  for  the  morrow  and  confidence  in  the  future. 
Before  our  producers  themselves  we  must  place  our  workingmen, 
who  are  the  first  victims  of  these  displacements  of  production.  If 
we  wish  to  wrest  them  from  the  temptation  to  emigrate  to  the 
fortunate  lands  which  are  preparing  to  supplant  us,  we  must  pro- 
tect and  defend  their  labor.  In  order  to  do  that  we  must  attend  to 
the  means  of  securing  those  objects. 


XIII 

WAGNER:  AGRARIAN  STATE  VERSUS  MANU- 
FACTURING STATE ^ 

THE  entire  controversy,  political  and  literary,  concerning  eco- 
nomic policy  in  relation  to  land  and  to  foreign  trade,  centers 
essentially  on  the  question  which  it  has  of  late  become  customary 
to  refer  to  as  that  of  "Agrarian  State  versus  Manufacturing  State" 
— not  a  very  happy  terminology,  since  it  is  not  definite  and  does 
not  preclude  misconceptions  from  the  outset.  In  general  it  suggests, 
as  we  know,  an  economic  development  of  the  following  character : 
A  constantly  increasing  portion  of  the  needs  of  a  country  for  food- 
stuffs and  raw  materials  is  obtained  more  cheaply  from  abroad, 
partly  from  distant  lands  sparsely  peopled  and  extensively  culti- 
vated ;  and  this  importation  is  paid  for  by  the  export  of  domestic 
industrial  products.  This  applies  particularly  to  breadstuffs,  and 
also  to  such  raw  and  auxiliary  materials  for  the  different  industries 
as  can  be,  and  in  the  past  have  been,  produced  at  home  in  some- 
what adequate  quantity  and  quality,  and  at  a  not  prohibitive  cost, 
in  accordance  with  climate,  soil,  and  the  historical  development  of 
agriculture  and  forestry. 

Fundamentally,  the  development  from  an  agrarian  to  a  manu- 
facturing state  is  only  a  phase  and  continuation  of  the  develop- 
ment at  home  from  an  essentially  agrarian  activity  (where  the 
needs  of  each  household  for  manufactured  products  are  covered  by 
home  production)  to  the  division  of  labor  and  the  system  of  ex- 
change between  city  and  country.  This  development,  in  its  turn, 
affects,  and  is  affected  by,  the  transition  from  natural  exchange  to 
money  and  credit  exchange.  In  so  far  as  the  development  from  an 
agrarian  to  a  manufacturing  state  turns  upon  the  exchange  between 
agrarian  and  manufactured  products,  the  same  problems  figure  in 

lAdolf  Wagner  (1835-1917),  Agrar-  und  Industriestaat  (1901),  (pp.  23-3S, 
143,  152-160  of  2d  edition,  1902). 

343 


344  WAGNER 

world  trade  as  did  in  both  of  the  preceding  developments  —  from 
natural  to  money  exchange,  and  from  home  production  to  the  divi- 
sion of  labor  between  city  and  country,  the  so-called  urban  phase  of 
economic  organization.  Inasmuch,  then,  as  exchange  in  the  develop- 
ment of  the  manufacturing  states  projects  commerce  with  foreign 
countries  into  the  foreground,  the  problem  of  free  trade  or  protective 
tariff,  which  is  always  of  only  secondary  importance,  stands  out  more 
sharply,  for  it  is  not  without  its  role  in  the  urban  phase,  as  between 
city  and  country  ;  the  problem  of  agrarian  or  manufacturing  state 
becomes  that  of  national  or  world  economics — of  the  place  of  the 
economic  system  of  the  single  nation  in  the  economic  system  of 
the  world. 

In  considering  this  phase  of  economic  development  the  great  effect 
produced  by  purely  outward  circumstances  must  not  be  overlooked ; 
namely,  size,  geographical  position  and  extension,  and  the  entire 
constitution  of  things,  including  the  accidental  political  boundaries 
of  each  economic  domain,  which  is,  in  general,  in  our  time,  either  an 
individual  state,  or  a  group  of  states  combined,  by  customs-union 
or  the  like,  into  a  more  or  less  uniform  economic  domain.  Exchange 
on  a  large  scale  between  agrarian  and  manufactured  products  appears 
now  as  external,  international,  "world-economic,"  since  it  crosses  the 
lines  of  state  and  of  customs-union ;  again  as  internal,  international 
and  inter-provincial,  domestic-economic,  where  the  areas  concerned 
belong  to  one  and  the  same  economic  domain  as  above  defined. 
Every  change,  great  or  small,  in  the  political  world-chart,  every 
secession  or  accession  of  territory,  every  creation  of  independent 
territory  forming  a  separate  national  and  economic  domain,  every 
union  of  a  number  of  hitherto  independent  domains,  produces  a 
corresponding  change  from  internal  to  external  trade,  and  vice  versa. 
This  change  naturally  involves  a  change  in  the  commercial,  tariff, 
and  perhaps  transportation  conditions  affecting  the  trade,  and  that, 
in  its  turn,  may  effect  a  change  in  the  character  and  extent  of  the 
trade  itself.  But  it  is  evident  that  the  basic  economic  nature  of  that 
trade,  that  is,  the  exchange  between  agrarian  and  manufactured 
products,  need  not  in  consequence  undergo  any  change  in  principle, 
nor  a  considerable  change  of  any  kind. 

We  can  readily  perceive,  accordingly,  what  changes,  for  example, 
were  wrought  in  the  19th  century,  after  the  close  of  the  great  period 


AGRARIAN  VERSUS  MANUFACTURING  STATE     345 

of  the  wars  of  the  French  Revolution,  in  the  poHtical  map  of  Europe 
and  the  world,  and  how  other  changes  would  take  place ;  such,  for 
instance,  as  would  occur  should  Austria  and  Hungary  pursue  separate 
policies  even  as  regards  the  tariff  alone.  Austria  would  at  once 
appear  more  markedly  as  a  "manufacturing  state"  on  account  of 
its  presumably  continuing,  at  least  at  first,  to  export  manufactured 
goods  to  Hungary  to  some  extent.  The  latter,  on  the  contrary, 
would  appear  in  greater  measure  as  an  "agrarian  state"  on  account 
of  its  exportation  of  grain  to  Austria.  The  real  condition  of  things, 
however,  would  not  have  changed  at  all  in  principle  and  not  much 
perhaps  in  practice.  For  ev^n  in  the  present  united  tariff  and 
economic  domain  of  Austria-Hungary,  Austria  is  primarily  the 
"manufacturing  state,"  Hungary  the  "agrarian  state,"  not  only  in 
their  relations  to  the  foreign  commerce  of  their  joint  domain,  but 
in  those  of  the  commerce  between  the  two  divisions  of  the  Empire. 
Hungary's  lately  diminished  foreign  export  of  agricultural  products, 
especially  of  grain,  notably  to  Germany,  has  hitherto  been  counter- 
balanced by  its  increased  export  to  Austria. 

Even  within  the  limits  of  one  economic  domain,  therefore,  es- 
pecially of  one  of  large  extent,  conflicting  agrarian  and  manufac- 
turing interests  easily  arise  between  different  agrarian  sections  and 
between  different  manufacturing  sections.  In  the  manufacturing 
regions,  agriculture  suffers  from  the  competition  of  those  in  the 
wholly  agricultural  sections,  where,  for  instance,  grain  is  raised  at 
less  cost  and,  under  favorable  conditions  of  transport,  finds  its  way 
to  the  manufacturing  regions.  The  less  developed  industries  of  one 
section  of  a  country  suffer  from  the  competition  of  the  goods  of 
another  section  more  highly  developed  industrially.  The  point  of 
view  of  self-interest,  for  example,  of  the  farmers  in  a  manufacturing 
section  in  regard  to  inland  transport-rates  is  likely  to  coincide  with 
that  in  regard  to  transport-rates  in  foreign  commerce  and  duties 
upon  foreign  agricultural  products.  And  likewise  the  less  developed 
industries  of  one  section  of  a  country  may  have  greater  need  of  pro- 
tection against  the  competition  of  the  products  of  highly  developed 
industries  of  another  home  section  than  against  the  competition  of 
foreign  industry.  Examples  of  this  are  plentiful.  Western  and 
Southwestern  German  agriculture  protested  at  once  against  the 
graduated  rates  of  the  Prussian  railroads,  just  though  they  were 


346  WAGNER 

from  the  point  of  view  of  railway  policy,  because  they  increased  the 
competition  of  East-German  grain.  West-German  grain  culture 
might  profit  from  an  internal  protective  line  directed  against  East- 
German  grain.  The  infant  industries  of  East  Germany  would  be 
more  effectively  favored  in  their  development  by  such  inland  pro- 
tection than  by  many,  or  perhaps  all,  other  measures.  Similar 
conditions  obtain  between  Hungary  and  Austria  regarding  the  ques- 
tion of  independent  tariff  systems ;  in  other  words,  the  reestablish- 
ment  of  a  tariff  boundary  between  the  two  divisions  of  the  Empire. 
In  Russia  the  development  of  manufactures  suffers  from  the  compe- 
tition of  the  more  highly  developed  industry  of  Russian  Poland, 
which  is  evolving  into  a  sort  of  manufacturing  domain  within  the 
Russian  Empire.  In  the  United  States,  likewise,  the  cultivation  of 
grain  in  the  New  England  States  bordering  on  the  Atlantic  has  been 
thrust  farther  and  farther  back,  nay,  been  crowded  out,  by  the  com- 
petition of  Western  grain  produced  at  lower  cost  and  transported 
at  the  lowest  possible  rates.  It  is  only  the  fortunate  circumstance 
that  animal  and  vegetable  products  not  so  well  adapted  to  transpor- 
tation can  be  disposed  of  profitably  in  the  near-by  great  commercial 
and  industrial  towns  of  the  Atlantic  Coast  States  that  still  makes 
agriculture  in  that  section  remunerative. 

Within  the  limits  of  a  homogeneous  economic  and  political  system 
the  conflicting  interests  indicated  above  do  not,  indeed,  stand  out  so 
sharply,  and  appear  more  harmoniously  adjusted  in  the  interest  of 
the  region  and  its  inhabitants.  But  even  here  they  do  undoubtedly 
exist.  We  need  only  to  suppose  that  the  regions  with  such  conflicting 
interests  were  to  separate  as  political  and  economic  entities ;  for  ex- 
ample, Hungary  from  Austria,  Poland  from  Russia,  the  Atlantic  Coast 
States  from  the  Western  grain  regions  in  the  United  States,  etc.;  at 
once  those  conflicting  interests  would  stand  out  in  sharp  outline,  be- 
come subjects  of  national  concern,  and  in  all  probability  give  rise  to 
commercial  and  tariff  measures  corresponding  to  their  character. 

From  the  foregoing  considerations  it  appears  that  the  problem 
of  Agrarian  State  versus  Manufacturing  State  is,  in  one  respect, 
and  in  accordance  with  the  customary  view,  closely  connected, 
in  theory  and  practice,  with  the  problem  of  national  economics 
versus  world  economics — the  determination  of  the  place  of  the 
specific  economic  system  of  an  individual  nation,  whether  chiefly 


AGRARIAN  VERSUS  MANUFACTURING  STATE     347 

agrarian  or  chiefly  manufacturing,  in  the  general  economic  sys- 
tem of  the  world.  But  the  first  problem,  with  its  inherently  con- 
flicting interests,  is  by  no  means  completely  included  in  the  second. 
It  is  latent  also  in  the  problem  of  the  national  or  inter-provincial 
economic  organization  of  any  considerable  economic  and  national 
domain.  Only,  in  a  really  homogeneous  national  entity  it  will  not 
so  easily  prove  a  destructive  element,  though  it  may  be  disturbing 
enough  through  the  opposition  between  agricultural  and  manufac- 
turing regions  where  questions  of  domestic  and  foreign  policy,  par- 
ticularly those  regarding  trade,  commerce,  customs,  and  taxes  are 
concerned  (German  East  and  West,  North  and  South,  French  manu- 
facturing and  wine-producing  regions).  But  where  also  other  an- 
tagonisms exist — national,  religious,  or  political — as  is  the  case  in 
Austria-Hungary,  in  federal  states  like  the  North  American  Union 
or  the  German  Empire,  the  conflicting  interests  inherent  in  the 
question  of  Agrarian  versus  Manufacturing  State  may  easily  assume 
very  dangerous  proportions  and  give  rise  to  serious  consequences. 

It  will  be  well  to  take  this  into  account  in  considering  such  a  plan, 
for  example,  as  that  of  an  economic  union  of  Central  Europe,  or 
perhaps  of  all  Europe  (leaving  out  only  Russia,  and,  if  need  be,  the 
British  Isles),  however  constituted:  a  plan  which,  for  that  matter, 
decidedly  appeals  to  me,  since  its  realization  strikes  me,  as  it  does 
many  others,  as  an  eventual  necessity,  almost  as  a  vital  issue  for 
"cultural  Europe"  ("Kultureuropa").  I  would  not,  therefore, 
question  the  eventual  realization  of  such  a  scheme.  But  precisely  in 
such  an  ''economic  union" — I  intentionally  do  not  use  the  term 
"customs-union" — the  conflicting  interests,  for  instance,  of  French, 
German,  Italian  agriculture,  at  least  in  the  essentially  agricultural 
sections  of  those  countries,  as  opposed  to  such  sections  of  Hungary, 
Galicia,  Rumania,  etc.,  stand  out  in  bold  relief.  The  like  would 
hold  in  regard  to  the  conflicting  interests  of  the  highly  developed 
industrial  regions  of  that  complex  of  nations.  It  may  be  that  for 
the  realization  of  such  schemes,  and  for  the  permanent  maintenance 
of  such  an  economic  union,  those  economic  factors  offer  difficulties 
quite  as  great  as  those  presented  by  the  financial,  or  even  by  the 
political,  elements  of  the  case. 

In  what  follows  we  shall  essentially  deal  only  with  the  question  of 
Agrarian  versus  Manufacturing  State  as  presented  by  independent 


11 


348  WAGNER 

national  and  economic  domains  in  their  world-trade  relations.    But 
it  will  be  well  to  bear  in  mind  the  foregoing  considerations. 

The  effective  factors  in  the  entire  historical  movement,  from  the 
disruption  of  the  old  unity  of  natural  home  economics  to  the  modern 
coordination  of  national  economics  with  world  economics  and  to  the 
ever  more  enormous  development  of  the  latter,  are  chiefly  two.  But 
in  this  connection  I  do  not  deny  the  frequently  important  coopera- 
tion of  other  elements — notably  that  of  legal  systems,  personal 
status  (serfdom,  freedom),  private  and  public  administrative  law 
(relating  to  land,  the  trades,  commerce);  furthermore,  that  of  man- 
ners, morals,  religion,  indeed  of  Kultiir  as  a  whole.  These  matters, 
however,  I  shall  not  further  enter  into  here.  The  two  factors  are : 
first,  increasing  population,  as  it  is  shown  by  birth-statistics ; 
second,  technological  development — especially  in  the  so-called  in- 
dustrial processes  and  in  communication  and  transportation,  but 
also  in  extractive  industry,  particularly  agriculture. 

In  the  19th  century,  especially  since  the  close  of  the  great  wars  of 
the  French  Revolution,  the  factor  of  increasing  population  has  un- 
questionably been  of  singular  importance,  greater,  perhaps,  than  in 
any  other  period  of  history  of  like  duration,  that  is,  a  period  of  from 
two  to  three  generations.  It  was,  of  course,  in  its  turn,  strongly 
affected  by  the  second  factor,  technological  progress,  based  upon 
natural  science,  not  only  in  manufactures  but  also  in  agriculture  and  in 
communication  and  transportation.  The  technology  of  steam  is  but 
one  side,  even  though  hitherto  the  most  important  one,  of  this  progress. 
Without  this  new  resource,  which  has  increased  the  supply  of  food 
and  other  necessaries,  a  considerable  portion  of  the  people  now 
living  would  never  have  come  into  existence.  That  is  not  too  much 
to  say.  Within  the  boundaries  of  the  present  German  Empire  the 
population  in  1816  was  but  24,830,000;  at  the  close  of  1900,  it 
was  56,360,000,  in  spite  of  a  German  emigration  (chiefly  overseas) 
estimated  at  more  than  six  millions  since  1820.  Accordingly,  the 
density  of  population  in  these  84  years  has  been  more  than  doubled ; 
it  amounts  now,  1900,  to  104.2  per  square  kilometer,  nearly  comes 
up  to  that  of  Italy  (113  in  1901),  is  almost  four-fifths  that  of  Great 
Britain  and  Ireland  (132  in  1901  ;  that  of  England  and  Wales  alone 
is  215),  and  exceeds  the  almost  stationary  density  of  France  (72  in 
1901)    by  a  half.    The  comparison  of  great  domains  like  that  of 


AGRARIAN  VERSUS  MANUFACTURING  STATE     349 

Germany  with  small  ones  of  still  greater  density,  like  Belgium  or 
Holland,  is,  it  may  be  added,  inadmissible  for  our  problem.  The 
latter  domains,  even  though  politically  independent,  are,  neverthe- 
less, in  part  only  the  highly  developed  industrial  sections  of  the 
greater  geographical  commercial  region  of  Northwestern  Germany 
and  Northeastern  France. 

In  this  great  increase  of  native  population,  and  the  correlated 
marked  development  of  our  country  from  agrarian  to  manufacturing 
state,  there  is,  to  be  sure,  something  great,  significant,  and  gratifying. 

But  it  has  its  dubious  side  as  well.  And  this  is  either  overlooked, 
or  palliated,  or  denied  in  toto,  in  the  prevailing  optimistic  view  of 
the  glorifiers  of  that  development,  and  in  the  view  of  those  who 
advocate  a  general  economic  policy  and  an  agrarian  and  commercial 
policy  which  would  promote  in  ever  increasing  measure  our  evolution 
into  a  manufacturing  state. 

And  here  is  where  my  standpoint,  as  well  as  that  of  others, 
deviates.  We  do  not  share  that  optimism.  Not  that  we  are  "Agra- 
rians," "  Reactionaries,"  which  we  have  so  often  been  reproached 
with  being,  but  because  we  believe  that  this  evolution  into  a  manu- 
facturing state — not  that  it  is  altogether  wrong — is  in  its  newest 
phase  too  precipitately,  too  immoderately,  carried  out ;  that  its 
reaction  upon  national  life  in  general  is  in  many  ways  dubious ;  that 
its  solidity,  its  continuance,  moreover  its  advance  in  the  direction 
and  with  the  rapidity  that  it  has  recently  shown  cannot  be  perma- 
nently assured.  We  do  not  deny,  however,  that  economic  developments 
such  as  those  which  have  recently  taken  place  in  Germany  are  based 
upon  profound,  inherent  causes  ;  it  may  even  be  said  that  in  a  certain 
respect  they  bear  the  character  of  '^  natural  phenomena,"  as  it  were. 
But,  on  the  other  hand,  they  are  by  no  means  as  wholly  removed 
from  human  will  and  the  influence  of  purposeful  human  action,  and 
in  particular  legislative  and  administrative  measures,  as  a  recent 
view — ^of  which  traces  are  to  be  found  even  in  Brentano — assumes  : 
a  view  which  represents  a  reversion  to  the  formerly  prevailing  con- 
ception of  economics  as  a  purely  natural  process. 

Nor  do  we  behold  in  the  ever  swifter  increase  of  the  native  pop- 
ulation ;  in  the  ever  greater  shifting  of  rural  and  urban  populations, 
in  a  direction  favorable  to  the  latter ;  in  the  building  up  of  more 
and  more  great  cities,  with  larger  and  larger  population ;   in  the 


350  WAGNER 

crowding  together  of  agglomerations  of  people  in  comparatively 
small  industrial  and  mining  regions ;  in  the  absolute  stationariness 
— at  best — of  agriculture,  and  its  great  relative  decline ;  in  the 
great  increase,  absolute  and  relative,  of  the  population  engaged  in 
industrial,  mining,  and  commercial  pursuits :  we  do  not,  I  say,  behold 
in  all  this  a  phenomenon  as  wholly  favorable  as  do  our  opponents. 
We  ask  ourselves,  more  cautious  than  they,  whether  this  evolution 
answers  the  needs  of  the  nation  in  general ;  whether  it  is  a  sound 
one,  one  that  promises  to  endure,  one  whose  permanence  can  be 
assured.    Those  are  just  the  things  we  doubt. 

And  likewise  we  perceive  in  this  development  of  prevailing  condi- 
tions not  a  thing  purely  natural,  removed  as  a  matter  of  course  from 
conscious  human  volition  and  guidance,  but  a  thing  towards  which 
human  will,  as  evidenced,  among  other  things,  in  legislation  and 
administration,  can  and  should  take  a  certain  stand:  with  the  aim 
and  the  prospect — a  prospect  not  to  be  declined  as  impossible,  and 
surely  not  as  generally  harmful — of  intervening  successfully  in  such 
development  by  moderate  action.  Not,  by  any  means,  directly,  but 
indirectly  by  appropriate  regulation  of  economic  conditions,  which 
in  its  turn  will  react  effectually  upon  the  shifting  of  population. 

It  is  this  conception  of  things  and  their  interrelations  which 
determines  us  to  advocate  an  economic,  agrarian,  and  foreign-trade 
policy  which,  though  it  does  not  render  impossible  such  foreign 
trade  as  is  indispensable, —  the  importation  of  foreign  and  exporta- 
tion of  domestic  products, — seeks  to  put  it  upon  its  old  and  natural 
foundation :  where  those  commodities  which  either  cannot  be 
produced  at  home  at  all  or  only  in  altogether  insufficient  quantity 
and  inferior  quality  (things  dependent  upon  more  or  less  exclusively 
foreign  conditions  of  soil  and  climate)  are  of  course  obtained  from 
abroad  and  are  paid  for  by  the  export  of  suitable  domestic  products 
—  essentially,  therefore,  by  the  products  of  our  industries  and  mines ; 
where  a  great,  increasing,  and  profitable  international  trade  in  partly 
and  wholly  manufactured  articles  and  in  raw  materials  of  various 
sorts  and  qualities,  in  which  each  country  has  its  own  special 
superiority,  is  carried  on  to  the  advantage  of  all  concerned,  and  is 
even  encouraged ;  but  where  the  products,  particularly  the  ordinary 
agricultural  ones,  but  also  those  of  forest  and  mine,  which,  owing  to 
conditions  of  climate  and  soil,  we  succeed  in  producing  permanently 


AGRARIAN  VERSUS  MANUFACTURING  STATE     351 

or  have  naturalized  by  means  of  the  recent  developments  of  eco- 
nomic technology  (beet  sugar,  tobacco)  or  can  easily  naturalize, 
and  that  at  a  reasonable  cost,  where,  I  say,  these  are  increasingly 
developed  at  home  to  as  high  a  degree  as  possible.  And  this  we 
advocate  for  the  justifiable  and  great  object  of  making  us  more 
independent  of  the  importation  of  such  products  from  abroad,  and  of 
keeping  our  agriculture,  which  is  the  basis  of  economic  activity, 
whether  modern  or  ancient,  on  a  good  footing  and  making  it  capable 
of  maintaining  in  profitable  labor  a  larger  number  of  people  in  the 
rural  districts. 

Moreover,  we  favor  this  particularly  on  account  of  the  favorable 
effects  upon  the  population  in  general  of  country  life,  away  from  the 
crowding  of  cities ;  the  favorable  effect  of  rural  occupations  as  com- 
pared with  the  industrial,  and  almost  all  the  other  urban  callings. 
And  this,  in  its  turn,  reacts  favorably  upon  the  people  as  a  whole, — 
truly  serves  the  interest  of  the  nation ;  the  health  of  the  people, 
using  that  term  in  its  broadest  sense,  is  better  conserved  and  in- 
creasingly fortified.  The  broad  and  thoroughly  sound  views  of 
G.  Hansen  form  the  best  basis  for  this  conception  of  things  and 
their  relation.^ 

This  conception  is,  to  be  sure,  opposed  to  that  which  still  pre- 
vails in  social  economics — and  was  formerly  the  only  one  repre- 
sented— according  to  which  in  these  and  similar  questions  the  only 
problems  concerned  are  those  of  economic  values.  These  are  in- 
deed involved  and  require  consideration.  But  they  are  not  the  only 
things  concerned  or  to  be  considered.  To  attain  the  greatest  eco- 
nomic success,  the  greatest  measure  of  value,  at  the  least  possible 
cost,  the  smallest  expenditure  of  labor,  is  the  one  great  object  aimed 
at  in  the  familiar  "economic  principle"  or  fundamental  maxim  of 
economics — in  national  and  international  as  well  as  in  individual 
and  private  economy.  But  even  in  the  case  of  the  last,  the  pur- 
suance of  that  principle  is  not  the  only  right  lodestar,  particularly 
if  thereby  other  important  sides — and  especially  the  higher  sides — 
of  the  life  of  the  individual  are  jeopardized,  suffer,  or  are  stunted. 

^  G.  Hansen,  The  Three  Stages  of  Population,  "an  attempt  to  demonstrate  the 
causes  of  the  rise  and  fall  of  nations,"  1889.  In  spite  of  great  deficiencies  in  the 
purely  statistical  argument,  due  partly  to  lack  of  material,  a  work  of  intellectual 
power,  of  which  the  kernel  is  manifestly  sound. 


352  WAGNER 

Even  for  the  individual,  therefore,  it  is  dangerous,  and  as  a  general 
thing  not  right,  to  aim  only  at  getting  a  maximum  of  economic 
reward,  as  expressed  in  economic  values,  for  a  minimum  of  personal 
labor,  regard  being  had  only  to  the  quantity  of  exertion  without  any 
consideration  of  the  nature  of  the  work,  of  its  reaction  upon  other 
sides  of  the  life  of  the  "individual"  concerned  and  upon  the  "others," 
his  "fellow-creatures,"  his  "countrymen."  What  throughout  the 
ages  has  aroused,  and  still  arouses,  the  opposition  and  antipathy  of 
nations  against  the  Jews  dwelling  in  their  midst  and  their  predomi- 
nantly one-sided  mode  of  making  a  living,  and  likewise  in  the  Orient 
excites  the  same  sentiments  against  the  Armenians,  is  precisely  this 
ruthless  pursuance  of  that  "economic  principle"  in  individual 
economic  life. 

In  public  economy,  however,  every  kind  of  labor  and  every  achieve- 
ment of  labor,  all  division  of  labor,  and  every  socio-economic  calling 
must  be  valued  not  according  to  its  relation  to  the  realization  of  that 
principle  alone,  not  according  to  the  measure  in  which  it  accom- 
plishes that  realization,  but  according  to  its  general  influence  upon 
the  national  life  as  a  whole.  Here  the  pursuance  of  that  principle 
cannot  and  must  not  be  the  only  lodestar,  because  the  economic 
interests  which  revolve  about  the  element  of  economic  value  are  not 
merely  not  the  only  ones,  but  are  for  the  general  life  of  the  nation 
by  far  not  the  highest  ones.  The  great  question,  "What  is  a  man 
profited,  if  he  shall  gain  the  whole  world,  and  lose  his  own  soul  ?  " 
should  be  borne  in  mind  in  the  discussion  of  these  great  economic 
issues.  Only,  in  that  connection,  we  must  consider  not  alone  the 
religious  and  ethical  side  but  all  sides  of  human  life  which  are 
affected  by  the  economic  side.  The  question  of  the  kind  and  quan- 
tity of  labor  does  not  resolve  itself  into  the  "problem  of  value,"  in 
consonance  with  that  economic  principle,  but  is  related  to  the  general 
problem  of  occupations,  and  that,  again,  includes  the  additional 
problem :  what  effect  has  the  kind  and  quantity  of  work,  the  voca- 
tion, upon  the  other  aspects  of  the  life  of  the  individual,  and,  in 
accordance  with  the  prevalence  of  those  kinds  and  quantities  and 
vocations  among  the  people,  upon  the  national  life  in  general  ?  Ques- 
tions these  which  economics,  if  it  is  really  to  become  "Social  Eco- 
nomics," and  a  historical  and  ethical  science,  cannot  ignore.  That 
was  the  error  of  the  "classical"  political  economy,  and  is  still,  in 


AGRARIAN  VERSUS  MANUFACTURING  STATE     353 

the  main, — even  in  Germany, —  the  error  of  the  modern  and  more 
highly  developed  science  of  economics.  In  the  discussion  of  the 
"practical  problems"  of  commercial,  agrarian,  and  manufacturing 
policy,  and,  in  particular,  of  our  problem  of  Agrarian  versus  Manu- 
facturing State,  in  the  manner  of  Dietzel,  Brentano,  and  even  Schdj- 
fle,  this  error  is,  in  my  judgment,  striking. 

It  appears,  among  other  things,  in  Brentano's  reference  to  certain 
doctrines  of  Torrens  and  Ricardo  regarding  international  trade. 
According  to  these,  every  country  should  aim  to  engage  particularly 
in  those  branches  of  production  in  which  its  superiority,  based  upon 
natural  conditions  or  upon  historical  development,  is  greatest.  Inas- 
much, then,  as  an  international  exchange  of  these  products  for  other 
foreign  ones — in  which  though  the  first  country  is  perhaps  likewise 
superior,  it  is  so  in  a  less  degree — takes  place,  the  result  is  an 
economic  gain,  a  general  benefit,  for  each  of  the  countries  concerned. 
At  bottom  this  doctrine  is,  after  all,  only  a  dialectic  subtlety.  It 
contains,  indeed,  a  grain  of  truth,  but  the  quantitative  element — 
the  question  to  what  extent  such  an  exchange  will  in  the  future  be 
maintained  in  practice — is,  as  is  usual  in  that  method,  ignored.  It 
is  precisely  here  that  the  historical  method  in  political  economy  has 
made  good  its  challenge  of  the  value  of  the  mental  gymnastics  of 
the  old  school.  I  raised  this  objection  as  far  back  as  my  first  edi- 
tion. But  now  continuing  the  discussion,  let  me  take  up  still  another 
side  of  the  question  involved  in  that  doctrine. 

Assuming  that  a  country  is  really  permanently  and  decidedly 
superior  to  other  countries  in  the  production  of  certain,  even  impor- 
tant, articles — superior  to  them  in  greater  measure  than  in  the  case 
of  other  commodities ;  assuming  that  it  employs,  accordingly,  an 
ever  greater  part  of  its  labor  resources,  its  population,  its  capital, 
in  the  branches  of  production  in  which  it  particularly  excels,  for  ex- 
ample in  certain  great  branches  of  the  textile  and  mining  industries ; 
that  it  supplies  with  the  products  indicated  its  home  market  and 
increasingly  exclusive  foreign  markets ;  that,  on  the  other  hand,  it 
allows  its  own  production  of  other  articles  to  decline  more  and  more, 
and  supplies  its  needs  in  those  lines  ever  more  exclusively  from 
abroad.  Then,  to  be  sure,  so  long  as  production  and  trade  maintain 
this  character,  it  may  be  admitted  that  the  countries  concerned,  and 
particularly  the  superior  one,  would  reap  an  economic  advantage. 


354  WAGNER 

inasmuch  as  a  greater  quantity  of  commodities  is  obtained  with  a 
less  expenditure  of  labor.  If  we  were  dealing  exclusively  with  a 
problem  of  economic  value,  the  result  would  be  an  unalloyed  advan- 
tage. So  far  one  may  agree  with  Torrens,  Ricardo,  Dietzel,  Brentano. 
But  is  the  question,  as  an  economic  one,  to  say  nothing  of  its 
social  and  cultural  aspect,  settled  thereby  ?  By  no  manner  of  means ! 
Leaving,  again,  the  question  of  the  assured  permanence  of  that  con- 
dition of  production  and  trade  entirely  out  of  account,  what  would 
be  the  consequence  of  that  condition  during  its  continuance?  Evi- 
dently that  the  nation  with  its  great  superiority  in  particular 
branches  would  restrict  its  national  activity  to  those  few.  It  would 
perhaps  on  that  very  account  attain  a  special  skill,  but  at  the  cost 
of  a  one-sided  occupation  of  its  population,  the  narrowing  of  their 
views,  the  most  one-sided  physical  and  mental  development,  the 
absence  of  all  the  advantages  of  the  universality  and  variety  of  na- 
tional production,  and  of  the  favorable  reaction  of  this  upon  the 
national  life  in  general.  There  would  then  perhaps  be  scarcely  any 
agriculture,  except  a  little  to  supply  the  local  market  with  products 
difficult  to  transport  from  a  distance ;  scarcely  any  industries  except 
those  in  which  the  special  superiority  obtains,  and  those  branches  of 
production  necessarily  closely  connected  with  them  locally.  The  agri- 
cultural quota  of  the  population  would  sink  to  a  minimum,  the  manu- 
facturing and  mercantile  would  rise  to  a  maximum ;  but  here  again 
the  industries  which  are  excelled  in  would  constitute  the  greatest 
part.  That  things  would  hardly  develop  to  quite  such  an  extreme 
in  reality  must,  indeed,  be  admitted.  But  if  problems  of  economic 
value  were  really  the  only  things  to  be  considered,  then  such  an 
extreme  development  would  be  the  proper  aim,  to  realize  which  as 
nearly  as  possible  every  effort  should  be  made,  every  obstacle 
removed ;  and  furthermore  a  development  in  the  direction  of  this 
extreme  would  be  the  natural  consequence  of  a  regime  of  perfect 
freedom  in  trade  and  production.  The  "country  of  superiority," 
then,  would  have,  for  example,  little  outside  of  coal-mining  and  the 
metal  and  textile  industries,  and  accordingly  only  miners,  metal- 
workers, spinners,  weavers,  etc.  among  its  laboring  population.  Can 
such  a  development — even  though,  from  a  ''purely  economic"  stand- 
point, that  is,  its  relation  to  the  solution  of  the  problem  of  produc- 
tion, of  value,  it  would  be  the  most  advantageous  one — be  really 


AGRARIAN  VERSUS  MANUFACTURING  STATE     355 

looked  upon  as  conducive  to  the  true,  the  abiding  interest  of  the 
nation's  economy,  of  its  civilization,  of  the  national  life  as  a  whole? 
To  the  question,  put  in  this  form,  every  man  of  sense  will  answer 
No.  But  it  may,  it  must,  be  put  in  this  form,  because  it  is  precisely 
in  the  hypothetical  case  of  such  an  extreme  condition  of  things— 
as  is  always  the  case  when  one  proceeds  consistently — that  the 
untenable  stands  out  most  clearly.  And  though  even  England,  even 
its  chief  manufacturing  and  mining  centers,  and  our  chief  German 
manufacturing  districts, —  those  of  Diisseldorf,  Arnsberg,  the  King- 
dom of  Saxony, — are  as  yet  far  removed  from  this  hypothetically 
assumed  extreme  condition,  yet  they  are  approaching  that  develop- 
ment, and  already  exhibit  some  of  its  deplorable  attendant  phenom- 
ena, in  the  division  of  labor  among  their  inhabitants,  and  in  England 
in  the  decline  of  agriculture,  and  especially  of  the  cultivation  of 
grain.    Vestigia  terrent. 

But  the  development  of  production  and  trade  that  we  are  con- 
sidering would  carry  in  its  train  still  other  effects  and  accompanying 
phenomena,  an  estimate  of  which  is  requisite  in  order  to  determine 
one's  attitude  towards  the  whole  agrarian  and  manufacturing  prob- 
lem. The  development  that  has  in  fact  already  taken  place — devel- 
opment for  example  in  England,  or  in  our  manufacturing  districts, 
which  are  essentially  devoted  to  manufacturing  for  export — exhibits 
the  symptoms  referred  to  in  a  degree  quite  sufficient  to  furnish  food 
for  thought.  The  necessary  intermediary  in  these  activities  is  trade, 
whose  function  must  become  all  the  more  important,  and  its  position 
consequently  all  the  more  controlling,  the  more  complex  the  form 
assumed  by  export  on  its  mercantile  side,  the  more  distant  the  terri- 
tories it  must  seek,  the  more  seriously  it  would  be  endangered  by 
outside  competition.  The  spirit  of  trade,  or  rather  the  trader  spirit, 
must,  therefore,  become  ever  more  specialized,  one-sided,  ruthless ; 
must  increasingly  infect  the  entire  national  spirit,  and  assimilate  it 
to  itself.  The  more  completely  a  country  concentrated  its  efforts, 
in  accordance  with  the  above-mentioned  doctrine,  on  some  few  indus- 
tries in  which  it  excels,  the  more  would  this  spiritual,  ethical,  and 
even  economic  degeneration  be  bound  to  take  place.  To  maintain 
at  any  cost  the  superiority  in  production,  in  sales ;  to  employ  every 
means  for  that  object,  every  sort  and  form  of  competition ;  to  open 
and   reserve   for  itself   every  possible   new   market — would    be   a 


3S6  WAGNER 

necessity,  a  vital  issue.  The  trader  spirit,  trader  conceptions,  trader 
interests,  would  dominate  everything.  What  we  see  already  in  the 
extension  of  stock  speculation  to  private  circles,  in  real-estate  specu- 
lation in  our  large  cities  and  the  incipient  extension  of  it  to  places  in 
the  mountains  and  on  the  seashore  prospectively  rich  in  beautiful 
sites  for  foreign  patronage  or  country  outings,  would  penetrate  more 
and  more  all  the  strata  of  society.  What  present-day  England 
exhibits  to  us  in  sufficiently  abhorrent  form  in  her  Boer  War — 
its  origin,  its  continuance,  its  object,  the  mode  of  warfare  pursued 
— are  not  these  symptoms  enough  to  bring  out  in  sharp  relief,  as 
with  a  searchlight,  the  real  nature  of  the  trader  spirit  which  takes 
possession  of  a  whole  people  like  the  English,  otherwise  so  worthy, 
when  it  has  reached  the  stage  of  "world-economic  manufacturing  and 
export  State "  ?  Sapienti  sat,  one  would  think !  The  picture,  in 
good  truth,  is  not  an  engaging  one. 

But  these  consequences  are,  to  be  sure,  "in  accordance  with 
nature,"  even  "a  natural  necessity,"  provided  one  has  allowed  the 
foundations  of  political  economy  to  be  shifted  to  this  one-sided 
development.  But  whether  this  itself  is  a  "natural  necessity" — 
that  is  the  question.  Whoever — like  the  freetraders,  like  Dietzel  and 
Brentano  as  well  —  basing  his  view,  it  may  be,  upon  the  above- 
mentioned  doctrine  of  Torrens  and  Ricardo,  simply  answers  in  the 
affirmative,  answers  too  easily.  Whoever  replies  in  the  negative,  or 
is  doubtful  about  answering  in  the  affirmative,  at  least  takes  the  stand 
that  a  problem  is  in  question  here  which  cannot  be  solved  offhand 
according  to  the  cheap  recipe  of  laissez  faire :  and  this  particularly 
because  we  are  dealing,  as  is  always  the  case  in  political  economy, 
not  only  with  "natural  tendencies  of  development,"  but  with  things 
which  are  at  all  events  also  subject  to  human  insight,  will,  and 
determination ;  and  furthermore  especially  because  the  effects  and 
attendant  phenomena  of  the  so-called  natural  economic  develop- 
ment are  of  a  character  so  grave  that  we  cannot  ignore  the  question 
whether  in  point  of  fact  that  development  is  inevitable. 

We, — myself  and  others, — who  in  our  view  of  the  problem  of 
Agrarian  versus  Manufacturing  State  differ  with  the  freetraders  and 
the  Socialists,  do  not  believe  so.  We  find,  therefore,  in  a  condition 
of  things  in  which  agriculture  continues  to  flourish,  and  a  greater 
number  of  people  continue  to  be  employed  in  rural  labor — even 


AGRARIAN  VERSUS  MANUFACTURING  STATE     357 

though  this  be  brought  about  by  an  agricultural  protective  tariff,  a 
blessing  for  the  nation  as  a  whole.  And  this  even  if,  as  a  result, 
consumers  should  be  obliged  to  pay  somewhat  higher  prices,  tem- 
porarily or  even  permanently,  than  those  that  would,  for  the  time 
being,  obtain  under  free  trade.  We  hold  that  such  a  condition  has 
a  more  assured  continuity ;  that  the  progressive  evolution  of  a  more 
wholesome  economic  life  would  offer  and  secure  to  the  nation  as  a 
whole  a  mode  of  life  and  a  kind  of  prosperity  better  suited  to  the 
real  economic,  social,  ethical,  cultural,  and  political  interests  of  the 
entire  community  than  the  feverish  activity  of  the  purely  manu- 
facturing state.  Such  a  state  draws  an  ever  increasing  part  of  its 
needs  in  foodstuffs  and  raw  materials  from  abroad — as  long  as  it 
can,  and  they  are  not  too  dear — and  disposes  of  an  ever  increasing 
quantity  of  domestic  manufactures  abroad — again  as  long  as  it  can, 
and  get  a  sufficient  profit ;  not  at  prices,  therefore,  which  would  only 
allow  the  payment  of  starvation  wages  and  cease  to  yield  a  satis- 
factory gain. 

From  this  standpoint  we  favor  ''agrarian"  demands,  not  to  serve 
''bread-usury,"  not  even,  primarily,  for  the  sake  of  the  landowners 
or  farmers — be  they  peasants  of  low,  medium,  or  high  degree. 
Junkers  or  lords  of  the  manor — but  because  we  regard  the  main- 
tenance of  a  part  of  the  population,  absolutely  and  relatively  con- 
siderable, in  landownership  and  farming,  and  the  permanence  of  the 
economic  efficiency  of  such  inhabitants,  as  an  essential  requirement 
of  the  welfare  and  the  enduring  economic  and  social,  as  well  as 
physical,  ethical,  cultural,  and  political  soundness  and  security  of 
the  whole  nation. 

We  do  not  conceal  from  ourselves  or  others  the  fact  that,  like  all 
great  things  of  which  a  nation  stands  in  need — defensive  strength, 
internal  administration,  justice,  educational  system,  care  of  eco- 
nomic interests,  etc. —  this  "maintenance  of  the  permanent  economic 
and  human  strength  of  the  nation  "  by  an  adequate  quota  of  vigorous 
rural  inhabitants  demands  sacrifices.  But  we  believe  that  here, 
as  in  the  other  cases  mentioned,  it  is  necessary  to  make  these  sacri- 
fices for  the  sake  of  the  higher  object.  Brentano,  in  his  second  series 
of  articles,  seeks  to  cast  ridicule  upon  our  theory  by  representing  it 
as  one  that  contemplates  cultural  "supermen."  But  raillery  is  out 
of  place  in  a  matter  so  serious.    If  an  appropriate  economic  policy 


358  WAGNER 

burdens  the  consumers,  "labor,"  with  a  somewhat  higher  price  of 
foodstuffs,  even  of  bread — whether  and  to  what  extent  it  does  so  is 
still  an  open  question  which  is  by  no  means  determined  by  the  usual 
"statistical  proofs"  of  the  difference  of  cost  between  "dutiable" 
and  "duty-free"  grain ^ — this  is  a  consequence,  undesirable  in  one 
respect,  but  unavoidable.  This  should  be  counteracted  by  all  possi- 
ble means  and  certainly  in  part  by  express  compensation,  as  we 
shall  presently  explain ;  but  in  so  far  as  it  cannot  be  prevented  it 
should  be  accepted,  and  should  be  looked  upon,  and  justified,  as 
something  that  will  help  to  guarantee  to  the  nation  as  a  whole  a 
more  tranquil,  more  assured  general  development,  a  thing  that  is 

^The  question  of  the  effect  of  the  duties  on  grain  upon  the  price  of  grain  (and 
similarly  for  other  foodstuffs,  though  in  these  the  matter  is  not  of  like  prac- 
tical importance),  and  again  of  the  higher  price  of  grain  upon  the  price  of 
bread,  plays  a  part  in  the  arguments  of  both  parties  concerning  the  grain  duties 
and  the  Agrarian  versus  the  Manufacturing  State.  In  the  customary,  purely 
mechanical,  view  of  the  freetraders  and  the  Socialists,  the  increase  of  the  price 
of  bread  by  the  full  amount  of  the  duty  on  grain  is  assumed  offhand  to  be 
proved  by  deductive  reasoning,  and  is  further  declared  to  be  established  by  in- 
ductive statistical  evidence;  and  consequently  the  charge  of  "bread-usury"  is 
made  against  the  Agrarians  and  all  other  advocates  of  duties  on  grain.  On  the 
other  side,  too,  counter-arguments  are,  to  be  sure,  often  treated  too  lightly,  the 
objections  to  high  bread-prices  are  belittled  or  glossed  over,  or  compensation  by 
automatic  economic  processes — especially  by  a  supposed  corresponding  increase 
of  wages — is  too  readily  taken  for  granted.  .  .  . 

For  the  problems  discussed  in  this  paper,  however,  it  is  not  necessary  to  enter 
more  closely  into  this  much-discussed,  but  still  controversial,  question.  For  even 
if  it  were  right  to  assume  that  the  price  of  bread  keeps  exact  pace  with  the 
price  of  grain ;  that  tbe  latter  follows,  precisely  and  generally,  in  a  great 
country  like  Germany,  the  duty  on  grain;  that  wages  do  not  keep  pace  with 
the  price  of  bread,  and  in  particular  that  a  rise  in  the  price  of  bread  means 
a  corresponding  fall  in  the  real  wages  of  labor — even  if  all  this  were  assumed 
to  be  true  and  in  agreement  with  the  facts,  the  verdict  against  duties  on  grain 
would,  even  then,  from  a  general  economic  and  socio-political  viewpoint,  not 
be  confirmed ;  nor  would  our  position  in  this  entire  question  of  Agrarian  versus 
Manufacturing  State  be  by  any  means  proved  untenable.  For  the  arguments 
advanced  in  the  above  text  continue  in  force  all  the  same,  and  it  is  only 
the  necessity  and  expediency  of  compensatory  measures  that  is  made  more 
manifest.  .  .  . 

So  far  as  Germany  is  concerned,  I  am  inclined  to  believe  that  the  trans- 
ference of  the  current  duty  on  grain  to  the  domestic  price  in  general  has  now 
been  completely  effected  ;  though  I  am  in  some  doubt  as  to  whether  it  was  the 
abolition  of  the  requirement  of  proofs  of  identity  that  brought  about  this 
complete  transference,  which  is  the  assumption  on  which  the  pending  tariff  bill 


AGRx^RIAN  VERSUS  MANUFACTURING  STATE     359 

certainly  in  the  true  interest  of  the  working  classes  above  all.  In 
this  circumstance,  the  nation,  and  not  least  the  working  classes, 
would  receive,  so  to  say,  the  "equivalent"  for  any  sacrifices  it  might 

have  to  make. 

*********** 

The  assumptions  of  the  rapid,  and  ever  more  rapid,  development 
of  the  manufacturing  state,  whereby  the  economic  center  of  gravity 
is  shifted  more  and  more  to  foreign  trade,  are,  first  and  foremost, 
that  foreign  countries  are  willing  and  able  to  supply  us  with  agri- 
cultural products  in  general,  and  in  particular  with  such  as  we 
require,  at  reasonable  rates ;  secondly,  that  the  obtaining  of  such 
products,  in  great  part  overseas  from  the  New  World  and  other 

is  based.  Even  in  that  case  I  do  not  feel  myself  obliged  to  modify  my  position 
on  the  question  of  grain  duties,  but  I  should  like  here  to  add  two  remarks. 
First,  that  even  under  the  assumption  of  the  complete  transference  of  the 
duty  to  the  price,  what  occurred — as  all  the  statistics  show — was  not  so 
much  a  rise  in  the  price  of  grain  as  the  prevention  of  any  considerable  fall 
in  that  price:  the  same  thing  in  principle,  but  a  very  different  thing  in  its 
practical  effect,  and  therefore  in  the  judgment  that  must  be  passed  upon  the 
whole  measure  from  the  standpoint  of  the  interests  of  producers  and  consumers. 
Furthermore :  the  difference  of  price  between  foreign  dutiable  and  duty-free 
grain  at  home,  and  between  foreign  grain  in  the  exporting  countries  (Russia, 
North  America,  Argentina,  etc.)  and  in  a  country  with  no  duties  on  grain 
(England),  on  the  one  hand,  and  on  the  other  hand  between  our  domestic  grain 
and  dutiable  foreign  grain  does  not  demonstrate,  as  has  often  been  justly 
objected,  everything  concerning  the  real  effect  of  a  duty  on  grain.  The  fact 
may  be  that  the  duty  is  a  factor  in  determining  the  world-market  price,  and 
that  the  world  price  of  grain  in  the  chief  export  and  import  countries  would 
be  higher  if  there  were  nowhere  any  duties  on  grain.  In  a  related  case,  it  is 
indeed  pretty  generally  admitted  that,  in  accordance  with  harvest  eventualities 
and  the  like,  the  grain-import  duty  of  a  country  falls  more  or  less,  and  at 
times  entirely,  upon  the  exporting  country,  the  price  in  that  country  being 
depressed  by  it;  this  is  true  in  the  case  of  a  big  crop  of  rye  in  Russia,  Ger- 
many's need  of  it  being  less  on  account  of  the  duty.  To  be  sure,  the  protective 
effect  of  the  duty  will,  in  such  circumstances,  be  diminished  or  disappear  alto- 
gether, the  financial  effect  alone  remaining, — but  this,  too,  is  a  favorable  effect 
for  the  grain-duty  country.  If,  however,  it  could  really  be  assumed  that  in 
general  the  price  of  grain  in  the  world  market  would  be  somewhat  higher  if 
there  were  no  duties  on  grain,  then  another  of  the  chief  objections  of  the 
opponents  of  such  duties — as  causing  a  rise  of  prices,  or  as  keeping  them  higher 
than  they  would  otherwise  be — would  fall  away.  For  their  domestic  prices 
also  would  be  somewhat  higher  without  the  duties,  because  of  their  adjust- 
ment to  the  latter,  and  their  dependence  on  the  prices  that  obtain  in  the  world 
market.  ... 


36o  WAGNER 

parts  of  the  earth  and  from  Eastern  Europe,  is  sufficiently  assured ; 
thirdly,  that  our  manufactures  will  find  an  adequately  assured  out- 
let— either  in  the  countries  furnishing  the  agricultural  products 
or  in  others — at  prices  profitable  to  us,  so  that  the  expenses  in- 
volved in  home  production  (including  an  adequate  return  to  enter- 
prise and  capital)  are  covered.  Only  in  case,  and  in  so  far  as  all 
of  these  assumptions  can  be  realized,  is  the  system  of  the  manufac- 
turing state,  described  above,  to  be  regarded  as  practicable  and 
permanent.  Otherwise,  it  threatens  to  give  way  and  collapse — to 
say  nothing  of  all  its  other  objectionable  aspects  and  consequences. 

Let  us  examine  these  three  assumptions.  Of  the  first  and  second, 
a  brief  discussion  will  suffice  for  our  purposes;  in  the  case  of  the  first 
some  statistical  data  must  be  brought  in,  to  show  the  extent  of  our 
dependence  upon  importations  from  abroad.  The  third  assumption 
is  the  most  important  for  our  problem  of  the  manufacturing  state, 
and  must  consequently  be  examined  more  thoroughly.  In  the  matter 
of  agricultural  imports,  we  are  concerned  first  and  foremost  with 
breadstuffs,  wheat  and  rye ;  next  with  other  grains,  including 
Indian  corn ;  and  finally  with  some  kinds  of  meat  and  fats,  and 
occasionally  live-stock  and  eggs — altogether,  in  the  main,  human 
foodstuffs.  To  these  we  must  add  raw  materials,  such  as  materials 
for  spinning  and  weaving,  skins,  seeds,  etc.,  and  wood.  A  great 
part  of  these  materials,  especially  those  which  we  do  not  and  cannot 
produce  at  home,  are  practically  outside  of  the  scope  of  our  problem  ; 
for  example,  cotton,  silk ;  these,  like  other  "colonial"  goods,  must  be 
obtained  from  abroad.  Wool,  especially  of  the  inferior  grades,  and 
skins,  we  shall  also  permanently  have  to  obtain  from  foreign  coun- 
tries. Nor  is  it  likely  that  there  will  be  a  dearth  there  of  those 
articles — at  least  of  cotton  and  perhaps  silk,  and  of  some  kinds  of 
wool — so  long,  at  any  rate,  as  the  countries  producing  them  do  not 
themselves  develop  manufactures  in  these  lines ;  a  thing  which,  to 
be  sure,  is  by  no  means  improbable  in  the  future.  Thus  it  is  with 
foodstuffs,  and  among  these  with  breadstuffs,  that  we  are  chiefly 
concerned. 

We  see  from  all  these  figures  what  immense  values  are  involved, 
in  the  modern  "manufacturing  states,"  in  the  importation  of  foreign 
agricultural   products,  competing   more  or  less  with  the  domestic 


AGRARIAN  VERSUS  MANUFACTURING  STATE     361 

output.  And  yet  the  chief  difficulty,  as  is  admitted  below,  does  not 
consist  in  obtaining  these  articles  from  abroad,  but  in  finding  foreign 
markets  for  the  manufactures  which  (along  with  other  credits — 
freight  charges,  interest  on  capital  investments  and  on  current  debts, 
etc.)  serve  as  part  payment  for  the  imports.  (See  below,  section  3.) 
In  spite  of  the  gigantic  magnitude  of  these  imports,  there  is  no 
special  cause  for  immediate  concern  as  to  whether,  and  under  what 
conditions,  we  shall  be  able  henceforth  to  satisfy  our  needs,  at 
reasonable  rates,  in  breadstuffs  and  in  most  of  the  other  commodities 
which  we  and  Great  Britain  draw  from  abroad.  It  may  be  readily 
admitted,  too,  that  the  importation  of  grain  furnishes  a  desirable 
safeguard  against  our  still  considerably  fluctuating  harvests.  With 
the  present  system  of  transportation,  however,  we  should,  as  has 
been  remarked  above,  by  no  means  suffer  any  deprivation  should  we 
not  draw  regularly  upon  foreign  grain  in  such  large  quantities. 
But  on  the  other  hand,  we  can  by  no  means  always  be  sure — and 
probably  less  so  in  the  future  than  now — that  foreign  countries 
will  not  at  times  refuse  us  the  importation  of  the  foodstuffs  and  raw 
materials  which  we  require,  or  make  it  difficult  for  us  to  obtain  them, 
owing  either  to  their  own  needs — caused,  it  may  be,  by  bad  home 
harvests — or  to  considerations  pertaining  to  their  economic  and 
financial  policy.  I  will  call  attention  only  to  the  Russian  embargo 
on  the  exportation  of  rye  at  the  time  of  the  great  failure  of  the 
crops  in  1891-92  ;  to  the  British  plan,  already  in  operation,  of  an 
export  duty  on  coal ;  to  the  thought  that  has  been  entertained  in 
cotton-growing  countries — e.g.,  in  the  6o's,  after  the  Civil  War,  in 
the  United  States — of  putting  export  duties  on  cotton.  That  coun- 
try and  people,  of  the  crassest  national  economic  egotism,  under 
the  leadership  of  its  industrial  magnates  and  heads  of  trusts,  is 
capable  of  anything,  and  will,  as  soon  as  it  sees  therein  an 
advantage  to  itself,  put  export  duties  on  cotton,  and  possibly  on 
grain  also,  if  it  seems  in  any  way  practicable ;  for  example,  if  the 
United  States  should  be  the  only,  or  almost  the  only,  country  upon 
which  Europe  could  draw  for  grain.^  After  all  duties  on  exports 
had  been  abolished,  it  was  assumed  that  export  duties,  whether 
for  financial  or  for  protective  purposes,  had  been  "definitely  done 
away  with"  throughout  the  civilized  world.  England  has  taught  us 
1  Export  duties  are  forbidden  by  the  United  States  constitution.  (Ed.) 


362  WAGNER 

otherwise.  She  beUeves  that  the  other  countries  cannot  do  without 
British  coal,  particularly  coal  of  certain  kinds,  and  will  therefore 
bear  the  burden  of  the  export  duty  on  it.  She  suddenly  goes  to 
work  in  1901,  "realistically"  abandoning  all  "principles,"  and 
adopts  this  means  of  imposing  part  of  the  cost  of  the  Boer  War 
upon  foreign  countries, — as  an  atonement  for  their  siding  with  the 
cause  of  the  Boers,  the  Britons  might  contemptuously  add !  Besides, 
purely  political  grounds  of  enmity,  of  unfriendliness,  of  intentional 
injury  to  the  land  and  people  which  stand  in  need  of  foreign  prod- 
ucts, may  lead  to  the  prohibition  of  exports  or  to  the  imposition  of 
a  duty  upon  them,  as  a  general  measure  or  one  directed  against  a 
particular  country ;  for  example,  in  war  times  under  the  pretext 
of  a  "neutral"  attitude — this  applying  especially  to  grain. 

But  even  if  our  importation  of  foreign  commodities  were  not  in- 
tentionally made  difficult  or  prevented  by  such  commercial,  financial, 
or  general  political  policies, —  the  ability  of  foreign  countries  to 
supply  our  needs  may  be  lessened,  or  cease  altogether,  temporarily 
or  permanently.  Temporarily,  as  has  already  been  remarked,  in 
the  case  of  bad  foreign  harvests,  as  in  the  aforementioned  case  of 
Russian  rye ;  as  in  the  Civil  War  in  the  United  States  in  the  case  of 
cotton,  when  its  production  ceased  almost  entirely,  and  its  export  as 
good  as  entirely,  during  the  course  of  the  war.  Permanently,  if  the 
native  population  in  the  exporting  state  greatly  increases,  if  its 
needs  for  the  products  of  the  soil  multiply,  or  its  own  industries 
develop  to  such  an  extent  that  it  needs  all  or  nearly  all  of  its 
domestic  raw  materials  itself.  Particularly  in  the  case  of  such  impor- 
tant providers  of  our  foodstuffs  and  agricultural  raw  materials  as 
Russia  and  the  United  States  must  these  contingencies  be  positively 
reckoned  with  in  a  not  very  distant  future.  In  those  countries  too, 
then,  agriculture  must  become  more  intensive,  and  the  cost  of  pro- 
duction be  increased  in  consequence.  Under  such  circumstances,  we 
shall,  at  best,  obtain  these  continued  supplies  of  grain  etc.  from 
those  countries  only  at  considerably  higher  prices,  and  therewith  one 
much-stressed  advantage  of  the  manufacturing-state  regime  will 
disappear.  These  supplies  may,  moreover,  to  a  great  extent,  become 
permanently  impossible.  The  possibility,  namely,  of  acquiring 
steadily  increasing  quantities  of  breadstuffs — wheat  and  rye — for 
a  growing  world-population,  is,  according  to  recent  investigations. 


AGRARIAN  VERSUS  MANUFACTURING  STATE     363 

including  inquiries  into  the  natural  climatic  conditions  requisite  for 
grain  culture,  etc.,  much  more  limited  than  was  formerly  assumed  by 
a  widespread  optimism,  even  though  for  the  present  there  is  little 
likelihood  of  a  scarcity ;  in  Argentina,  for  example,  the  area  of  culti- 
vation could  be  greatly  extended/  When  cultivation  iDecomes  more 
difficult  and  expensive,  the  ''problem  of  population"  will  loom  up 
in  the  export  countries  also,  and  become  more  serious  with  us.^ 

In  export  countries  like  Russia,  moreover,  the  export  of  bread- 
stuffs  to  foreign  lands  does  not  even  now  represent,  or  at  all  events 
does  not  always  represent,  a  surplus  beyond  their  own  needs.  It  is 
at  least  in  part  derived  from  the  reduction  of  home  consumption,  in 
certain  districts  (often  under  stress  of  taxes  and  debts),  to  a  point 
where  the  pangs  of  hunger  are  barely  allayed.  Every  improvement 
in  living  conditions — surely  desirable  from  a  humanitarian  stand- 
point— of  a  not  inconsiderable  part  of  the  Russian  lower  classes 
will  diminish  the  amount  of  grain  available  for  export.  In  short, 
every  statesman,  every  political  economist  who  thinks  not  only  for 
the  moment,  and  who  has  to  do  with  economic  policy,  must  even  at 
the  present  time  take  into  serious  consideration  the  uncertainty  of 
a  permanently  large,  and  not  too  expensive,  importation  of  food- 
stuffs and  of  many  raw  materials,  above  all  of  breadstuffs.  This 
will  necessarily  lead  him  to  adopt  a  cautious  attitude  on  the  "prob- 
lem of  the  manufacturing  state."  The  class-centered  conception  of 
mere  commercialism,  which  thinks  only  of  the  immediate  present 
and  of  its  own  advantage,  cannot  possibly  be  the  guiding  star  of 
scientific  thought  or  of  rational,  practical  economics.  Nor  can  the  con- 
ception of  our  urban  industrial  workers,  frequently  equally  short- 
sighted, and  likewise  stamped  with  class-selfishness,  be  the  decisive 

iMuch  is  expected  from  the  restoration  pf  areas  where  grain  and  agricultural 
products  in  general  were  raised  in  the  past — for  instance,  in  Asia  Minor,  in  Meso- 
potamia and  neighboring  regions — if,  besides  establishing  adequate  security 
under  the  law,  it  should  be  found  possible,  by  a  comprehensive  system  of 
irrigation,  to  make  those  countries  better  fitted  for  cultivation.  An  important 
consideration  in  regard  to  new  areas  also,  such  as  those  in  South  Russia.  It  is 
not  only  the  extent  of  such  areas  that  is  overrated,  but  the  amount  of  rainfall, 
which  is  contingent  upon  climatic  conditions,  and  upon  which  the  volume  of 
water  available  for  irrigation  ultimately  depends — a  factor,  not  always  suffi- 
ciently appreciated,  to  which  my  brother,  Hermann  Wagner,  has  specially  called 
my  attention. 

2 The  author  discusses  this  at  length  in  his  third  chapter.    (Ed.) 


364  WAGNER 

factor.  These  people,  and  those  who  lead  and  mislead  them, — 
even  assuming  the  good  faith  of  the  latter  in  such  matters, — fix 
their  attention  only  upon  the  momentary  advantage  of  the  lower 
price  of  grain,  without  concerning  themselves  about  a  lasting  assur- 
ance of  its  continuance,  or  about  the  conditions  involved.  Even  in 
the  Social-Democratic  camp,  voices  such  as  Schippel's  or  Calmer's, 
are  like  those  of  preachers  crying  in  the  wilderness  and  do  not  pene- 
trate ;  nor,  as  we  have  seen,  do  they  always  dare  to  state  plainly 
the  necessary  conclusions.  But  at  least  they  do  not  belie  the  truth.^ 
2.  But  even  if  the  countries  which  export  agricultural  products 
were  always  willing  and  able  to  satisfy  our  necessary  demands,  we 
must  take  into  account,  besides,  that  in  the  case  of  a  country  occupy- 
ing a  geographical  and  political  position  such  as  does  Germany,  in 
time  of  war — a  contingency  which  we,  for  well-known  reasons, 
must  reckon  with  more  than  most  of  the  European  states — imports 
can  more  readily  be  cut  off.  Great  Britain,  in  particular,  with  its 
insular  position  and  its  supremacy  at  sea,  assured  at  least  for  the 
time  being,  is  more  favorably  situated  than  our  fatherland,  hemmed 
in  as  it  is  between  Russia  and  the  Slavic  world  on  the  one  side,  and 
France  on  the  other.  And  yet  even  in  England  itself  earnest  voices 
have  already  been  raised,  pointing  out  the  danger  of  being  starved 
out ;  and  in  thoughtful  mercantile  circles,  even  within  the  grain- 
trade  itself,  there  has  been  serious  discussion  of  the  "mediaeval" 
idea — an  idea  which  impresses  bigoted  freetraders  as  downright 
insane — of  maintaining  great  public  storehouses  of  grain  in  England 
because  the  food  supply  of  the  country  does  not  seem  sufficiently 
assured  through  the  processes  of  trade. 

^Our  problem  of  Agrarian  versus  Manufacturing  State  is  extended  here  to 
the  general  problem  of  the  limits  to  the  possible  increase  of  agricultural  produc- 
tion of  all  sorts  by  the  extension  of  cultivation  throughout  the  world,  and 
hence  to  the  problem  of  population  —  the  question  of  the  limits  to  the  possible 
increase  of  the  population  of  the  world,  which  is  ultimately  dependent  upon 
the  obtaining  of  agricultural  products,  particularly  of  foodstuffs.  We  cannot 
at  this  point  enter  into  the  matter  more  fully.  But  here,  too,  a  warning  voice 
may  be  raised  against  illusions  as  to  the  "unbounded"  magnitude  of  agricultural 
soil  in  existence  or  to  be  acquired,  particularly  as  regards  the  cultivation  of 
grain.  An  interesting  attempt  to  estimate  by  statistical  data  the  area  of  the 
earth  adapted  for  cultivation,  by  Ballod,  may  be  found  in  the  essay  "Boden 
und  Bevolkerung"  (Soil  and  Population),  a  supplement  to  the  TdgUche  Rund- 
schau, Jan.  12,  1900. 


AGRARIAN  VERSUS  MANUFACTURING  STATE     365 

I  do  not  wish  to  overrate  the  considerations  thus  brought  forward  ; 
I  admit  even  that  the  entire  economic  policy  of  a  great  state  cannot 
be  guided  solely,  or  even  primarily,  by  circumstances  such  as  great 
political  and  military  complications,  which  are,  after  all,  temporary 
and  exceptional.  They  will,  however,  form  an  important  subject  of 
consideration  for  every  thoughtful  economist  and  statesman.  Objec- 
tions and  refutations,  such  as  have  been  attempted  by  H.  Dietzel, 
Brentano,  and  others,  have  not  convinced  me,  at  least,  of  the 
opposite.  In  his  second  series  of  articles,  Brentano  again  expresses 
nothing  but  scorn  for  these  apprehensions,  and  calls  them  the  weak- 
est argument  of  his  Agrarian  opponents.  That  is  a  matter  of  opinion, 
I  do  not  overrate  it — a  thing  which  Brentano  does  not  mention  — 
but  I  do  not  take  it  as  lightly  as  he  does,  even  though  I  may,  in 
Brentano's  opinion,  be  acting  here  again  like  "clever  Elsie"  in  the 
fairy  tale. 

3.  More  important,  however,  than  all  that  has  been  set  forth 
above — more  important  even  than  the  uncertainty  of  a  permanent 
profitable  importation  of  agricultural  products — is  the  question  of 
the  disposal  of  our  own  products,  particularly  of  our  manufactures, 
in  foreign  countries — in  countries  which  export  agricultural  prod- 
ucts, and  in  others.  Here,  too,  the  question  arises :  Will  the  coun- 
tries always  be  willing,  and  able — and,  for  that  matter,  compelled 
—  to  absorb  foreign  products  in  general,  and  our  manufactures  in 
particular,  and  to  pay  adequately  for  them?  Now  we  observe  in 
those  countries,  again  above  all  in  the  United  States  and  Russia, — 
but  in  others  also ;  Rumania  and  Argentina,  for  example,  are  making 
a  beginning — strenuous  efforts  to  render  themselves  more  independ- 
ent of  the  importation  of  foreign  manufactures,  to  develop  their  own 
industries  by  means  of  high  protective  tariffs  and  other  measures. 
And  who  can  deny  that  these  efforts  have  been  crowned  with  great 
success,  especially  in  the  United  States,  but  to  some  extent  also  in 
Russia  and  other  agricultural  countries,  and  that  they  are  perfectly 
natural  from  the  standpoint  of  the  advocates  of  the  manufacturing 
state?  The  difficulties  involved  in  the  disposal  of  the  manufactures 
of  the  manufacturing  states  of  Europe  have,  indeed,  been  steadily 
increasing.  Above  all  in  the  foremost  of  these,  England,  they  have 
in  the  last  generation  grown  continuously  greater;  but  even  the 
Continental   countries,   Germany   especially,   are   having   the   same 


366  WAGNER 

experience.  Before  examining  the  case  of  England  more  closely, 
however,  let  us  consider  an  objection  which  our  opponents  are 
fond  of  making. 

This  industrial  development  in  countries  which  were  formerly 
agricultural  is,  they  say,  only  a  consequence  of  the  agrarian  protec- 
tive policy  of  our  own  and  other  grain-importing  countries.  If  we 
obstruct  the  importation  of  agricultural  products  for  those  countries 
into  our  own  they  are  compelled,  or,  at  any  rate,  stimulated,  to 
develop  their  own  industries  and  to  find  in  industrial  protection 
compensation  for  our  agricultural  protection !  It  was  only  our 
agricultural  protective  policy  that  drove  them  into  their  more  ex- 
treme manufacturing  protective  policy. 

This  assertion,  however,  presents  the  facts  and  the  historical 
course  of  events  in  an  altogether  false  light.  The  other  countries 
proceeded  with  their  commercial  policy  entirely  independently  of 
us.  They  did  so,  too,  in  spite  of  England's  absolute  free  trade  as 
regards  agricultural  products.  The  most  important  of  them,  es- 
pecially the  United  States  and  Russia,  have  long  had,  and  still  have, 
exorbitantly  high  tariff  rates  upon  manufactures,  and  would  have 
them  even  without  our  Continental  agricultural  imposts.  They  make, 
at  best,  some  slight  concessions  in  commercial  agreements,  as,  for 
example,  in  the  Russo-German  agreement.  And  certainly  from  the 
standpoint  of  the  manufacturing  state,  according  to  which  the  chief 
economic  advantage  is  to  be  found  in  manufacturing  development, 
there  is,  as  we  have  remarked,  nothing  to  wonder  at  in  this  commer- 
cial policy  of  countries  which  were  formerly  agricultural.  How  these 
excessive  imposts  upon  manufactures  affect  European,  including 
German,  exportation  to  those  countries  is  well  known  (United  States, 
McKinley  Bill,  Dingley  Tariff,  Russia,  etc.!),  not  to  mention  the 
aggravation  of  the  tariff  by  tricky  devices,  or  the  ad  valorem  duty 
system  (United  States).  The  possible  profit  upon  exports  of  manu- 
factures is  thus  substantially  diminished  for  us,  and  consequently 
also  the  possible  rate  of  wages  (Saxon  textiles,  Berlin  cloaks,  etc., 
Viennese  mother-of-pearl  articles). 

On  no  account,  however,  dare  we  Germans  threaten  countervailing 
measures  and  reprisals,  lest  the  freetraders  raise  an  outcry  at  once. 
Just  remain  "nice  and  calm,"  "nice  and  quiet,"  "no  grumbling," 
by  no  means  irritate  the  other  party,  the  Yankee,  the  Russian,  by 


AGRARIAN  VERSUS  MANUFACTURING  STATE     367 

raising  our  duties  on  agricultural  products  I  What  a  pitiful  exhibi- 
tion was  made  in  the  winter  of  1 900-1 901  by  part  of  the  free-trade 
press  and  by  the  mercantile  interests !  When  those  hectoring  articles 
— of  semi-official  origin^  it  was  said — appeared  in  the  Russian 
press,  in  opposition  to  the  contemplated  raising  of  the  German  grain 
duties,  our  valiant  merchants  and  their  press  promptly  crouched 
under  the  lash,  and  soon  themselves  joined  in  blowing  the  foreign 
horn !  We  passed  through  a  similar  experience  in  the  summer  of 
1 90 1,  at  the  time  of  the  publication  of  the  proposed  German  tariff. 
The  "freetraders"  and  their  political  partisans  again  solemnly 
pointed  a  warning  finger  to  the  "bad  impression  abroad,"  and  ex- 
plicitly raised  that  cry  as  confederates  against  such  a  tariff!  So 
lacking  were  these  gentry  in  pride  and  the  spirit  of  independence — 
a  symptom  of  the  "commercial  spirit"  of  the  manufacturing  state. 
Very  different  certainly  from  the  borne  but  proud  spirit  of  the 
Boers,  that  of  the  agricultural  state. 

To  the  emancipation  from  the  necessity  of  importing  West- 
European  manufactures — already  begun,  and  in  the  case  of  the 
United  States  and  Russia  pretty  well  advanced — must  be  added  a 
further  circumstance.  The  other  countries  of  Western  and  Central 
Europe — Britain  above  all — and  in  ever  growing  measure  the 
United  States  also,  compete  sharply  with  us  in  the  world  market,  in 
all  the  regions  which  offer  a  field  for  the  disposal  of  our  manufac- 
tures. Or,  to  put  the  matter  with  greater  historical  correctness,  we 
Germans  have  been  entering  into  ever  more  intense  export  competi- 
tion with  the  other  manufacturing  countries,  but  the  Americans  are 
following  us  swiftly  and  have  already  in  many  directions  overtaken 
us  and  the  others,  England  included.  Whence,  otherwise,  the  well- 
known  animosity  of  our  British  "cousins"  against  us?  It  is  easy 
enough  to  understand :  we  spoil  their  market,  their  prices,  make  their 
sales  more  difficult.  Apart  from  a  temporary  favorable  turn  during 
the  last  few  years,  British  exports  have  on  the  whole  remained 
pretty  stationary  for  decades,  as  will  be  set  forth  more  fully  below, 
and  they  have  become  less  profitable.  The  whole  system  of  the 
manufacturing  state,  however,  is  literally  dependent  on  a  continual 
increase  of  the  export  of  manufactures  and  its  maintenance  with  the 
highest  possible  profit,  in  order  to  provide  for  the  growing  need  of 
agricultural  products,  no  longer  covered  at  home.    The  only  prospect 


368  WAGNER 

is  that  this  condition  of  things  will  become  increasingly  acute. 
The  recent  commercial  development  of  Great  Britain  is  a  striking 
proof  of  the  probable  future  that  awaits  her — and  all  other  coun- 
tries with  a  one-sided  development,  wholly  dependent  upon  the 
export  of  manufactures. 

Commercial  treaties  with  the  countries  which  export  agricultural 
products,  and  with  others,  may  establish  a  modus  vivendi,  which, 
to  be  sure,  is  desirable.  But  they  will  not  and  cannot  be  of  any 
effectual  significance  as  regards  the  export  of  manufactures ;  and 
domestic  agriculture  will  in  the  case  of  such  treaties  only  too 
probably  have  to  pay  the  score,  as  did  ours  in  the  Caprivi  agree- 
ment. In  specialties  even  the  industrial  countries,  such  as,  for 
example,  Germany,  Great  Britain,  France,  will  always  be  able  to 
complement  each  other  more  or  less  by  reciprocal  imports  and 
exports.  But  whether  they  would  do  so  permanently  with  much 
profit  and  with  the  requisite  extension  of  trade,  and  in  all  the 
branches  of  such  specialties,  are  open  questions.  And  important  as 
this  may  be,  it  scarcely  suffices  to  procure  for  the  one  country  the 
requisite  great  amount  of  sales  in  the  other  country,  and  to  insure 
its  permanence.  For  each  country  strives,  again,  to  equal  the  other 
country  even  in  the  specialties  of  that  other,  in  order  that  it  may 
be  under  less  need  of  importing  them. 

A  country  which  exports  manufactures  can,  indeed,  better  its  con- 
dition by  technological  progress,  which  may  be  stimulated  by  the 
existing  sharp  competition.  And  it  is  a  gratifying  fact  that  a  part 
of  the  recent  manufacturing  advance  in  Germany,  in  the  chemical, 
iron,  electrical  industries,  etc.,  is  to  be  traced  to  that  cause.  But 
we  have  neither  a  monopoly  of  those  improvements,  nor  are  the 
other  Western  and  Central  European  nations  and  the  United  States 
inferior  to  us  in  the  capacity  for  technological  progress.  Whether 
Russia  is  so,  or  even  the  East-Asiatic  countries,  as  is  widely  assumed, 
is  still  to  be  demonstrated.  Here,  again,  I  am  not  so  optimistic  as 
my  opponents.  Furthermore,  the  increase  and  improvement  of  man- 
ufactures, and  the  reduction  of  their  cost,  have  their  limits,  even  in 
the  event  of  great  technological  progress.  International  competition, 
moreover,  exerts  a  pressure  upon  prices  and  profits.  Nor  in  its  greed 
of  gain  does  capital,  "without  a  country,"  hesitate  in  the  least  to  set 
up  manufacturing  plants  abroad  to  compete  with  the  home  industries, 


AGRARIAN  VERSUS  MANUFACTURING  STATE     369 

whenever  it  pays  to  do  so.  This  has  long  been  done  on  a  grand 
scale  by  British  capital  the  world  over.  But  it  is  done  also  by  capital 
—  Continental,  French,  Belgian,  Swiss,  and  not  least  German — in 
Poland,  Russia,  Austria,  America,  etc.,  especially  of  late,  by  the 
transfer  of  manufacturing  establishments  and  business  concerns  to 
foreign  countries  offering  better  prospects,  isolating  themselves  by 
protective  tariffs,  promising  higher  profits  and  lower  wages  for 
labor.  This  has  been  specially  and  justly  stressed  by  Oldenberg. 
We  shall  very  soon  experience  the  same  thing  in  China.  Our  posi- 
tion will  thus  be  made  still  more  unfavorable. 

Accordingly,  the  universal  cry  is:  new  markets — in  Asia,  Africa, 
and  wherever  else  something  may  still  be  expected.  Assuredly,  the 
proper  result  of  the  system.  But  it  leads  to  a  ruthless  policy,  to 
conflicts  and  combats,  either  with  the  governments  and  peoples  and 
manufacturing  concerns  of  the  regions  themselves  which  it  is  desired 
to  open  up  as  new  markets,  or  with  the  other  competitors  for  the 
economic  conquest  of  those  regions.  A  ruthless  "  Get  out  of  the  way, 
I  want  to  take  your  place"  is  the  outcome, — with  all  its  grievous 
and  mournful  ethical,  human,  social  consequences.  The  South- 
African  tragedy  and  the  shocking  method  of  warfare  of  the  "pious" 
Britons  against  the  Boers,  at  which  all  Europe  and  America  stand 
aghast, — where  indeed  is  the  ultimate  cause  for  all  this  to  be  found 
but  in  that  policy  of  expansion  and  robbery,  aimed  at  the  conquest 
of  territory  where  some  economic  advantage  may  still  be  reaped? — 
though  in  this  case  there  enters  also  the  ami  sacra  fames,  the  desire 
for  the  possession  of  the  Rand.  But  let  there  at  least  be  no  prating 
about  "Christianity."  . 

However,  one  might  possibly  disregard  all  that  if  this  "sales 
policy  of  the  manufacturing  state"  yielded  adequate  and  lasting  re- 
sults !  After  all  that  has  been  said,  this  still  remains  to  be  proved ; 
and  the  recent  developments  of  the  trade  of  the  most  important 
manufacturing  state,  the  British,  has,  as  we  shall  see,  demonstrated 
unmistakably  that  it  is  an  illusion. 

And  when  by  the  transfer  of  European  and  American  industrial, 
commercial,  and  banking  capital  to  countries  which  are  the  source 
of  many  agricultural  products  and  which  have  hitherto  furnished 
a  market  for  our  manufactures,  competitive  manufacturing  estab- 
lishments, with   cheap  labor,   shall  have  been   created ;    when   the 


370  WAGNER 

East  Asiatics — Japanese,  East  Indians,  Chinese — shall  have  been 
supplied  with  tools,  machinery,  technological  experts,  business  man- 
agers, foremen ;  when  they  shall  have  been  instructed  in  methods  of 
production  and  provided  with  railroads  etc. — what  will  the  result  be 
with  those  peoples?  That  they  will  have  less  need  of  our  manu- 
factures, will  work  up  their  raw  materials  at  home,  will  compete 
with  us  in  outside  markets,  nay,  in  our  own  domestic  markets 
themselves  —  and  all  the  more  successfully  since  they  have  at  their 
disposal  much  cheaper  labor.  IMany  signs  of  such  a  state  of  affairs 
are  already  apparent,  particularly  in  Japan  and  in  India  (cotton 
manufacture).  Even  if  these  civilized  Asiatic  nations  are  consider- 
ably inferior  in  intellectual  originality  and  technological  inventive 
ability  to  the  European  races,  a  thing  perhaps  too  confidently  taken 
for  granted ;  even  if  their  workmen,  with  poor  pay,  food,  and  mode 
of  life,  are  less  efficient  than  ours,  and  thus  their  low  wages  do  not 
mean  a  correspondingly  low  cost  of  production ;  if,  with  the  develop- 
ment above  indicated,  their  scale  of  wages  should  soon  be  consider- 
ably raised — as  is  said  to  be  the  case  already  in  Japan — and  thus 
that  disadvantage  for  us,  as  the  competitors  of  those  peoples,  would 
be  steadily  diminished ;  those  East  Asiatics  would  nevertheless  re- 
tain, at  least  for  a  considerable  time,  a  decided  advantage  over  us 
in  cost  of  production.  But  that  is  the  decisive  factor!  And  in  that 
factor  lies  the  limit  of  our  development  of  the  manufacturing  state : 
we  should  then  have  to  sell  at  lower  rates,  that  is,  on  the  basis  of 
lower  wages  and  smaller  profits,  and  could  not  even  on  such  a  basis 
do  so  with  certainty  of  permanence. 


XIV 

SCHULLER:  EFFECT  OF  IMPORTS  UPON  DOMESTIC 

PRODUCTION^ 

Partial  or  Complete  Displacement  of  Domestic  Branches 
OF  Production  through  Foreign  Competition 

UNDER  a  system  of  free  trade  goods  are  imported  in  case  the 
most  unfavorable  conditions  of  production  required  in  a  foreign 
country  for  supplying  its  needs  entail  less  expense  than  the  most 
unfavorable  conditions  to  which  recourse  must  be  made  in  the  home- 
country  for  satisfying  the  domestic  demand.  But  only  a  portion 
of  the  domestic  production  of  a  commodity  entails  the  maximum 
expense,  the  other  portions  being  produced  at  progressively  lower 
cost,  which  may  be  just  as  low  as,  or  even  lower  than,  the  expense 
entailed  by  those  foreign  factories  operating  under  the  most  unfav- 
orable conditions.  As  the  price  of  foreign  goods  must,  as  a  rule, 
cover  the  maximum  expense  involved  in  production  abroad,  it  fol- 
lows that  those  domestic  producers  whose  expenses  are  less  than 
those  of  the  most  unfavorably  situated  foreign  producers  are  in  no 
case  supplanted,  even  under  a  system  of  free  trade,  in  consequence 
of  foreign  competition.  They  maintain  themselves,  at  a  price  cor- 
responding to  the  maximum  foreign  expenses,  just  as  easily  as,  or 
more  readily  than,  the  foreign  producers  whose  production  involves 
the  same  expense. 

To  foreign  prices  must  be  added,  in  the  majority  of  cases,  an 
additional  sum  covering  the  higher  cost  of  transportation,  extra 
charges  for  packing  due  to  consignment  to  more  distant  points,  loss 
of  interest,  larger  sales-expenses  due  to  the  greater  difficulty  of 
personal  contact,  etc.  The  extra  expense  which  must  be  borne  by 
the  foreign  seller  differs,  of  course,  for  different  commodities.  In 
the  case  of  cattle  imported  from  more  distant  regions,  the  expense 

1  Richard  Schiiller  (1870-        ),  Schutzzoll  und  Freihandel  (190S),  chap.  ii. 

371 


372  SCHULLER 

is  much  greater  than  in  the  case  of  grain ;  in  the  case  of  grain, 
vegetables,  and  fruit,  the  extra  cost  is  considerably  greater  than  in 
that  of  silk  goods  or  other  industrial  products  of  relatively  high 
value.  The  freight-rate  on  a  carload  of  cabbage,  purchased  in 
Italy  for  500  marks,  amounts  to  more  than  1000  marks  on  con- 
signments to  Germany.  Most  difficult  and  expensive  of  all  is  the 
transportation  of  cattle  to  overseas  points.  A  factor  of  great  im- 
portance, moreover,  is  the  depreciation  of  goods  in  transit.  The 
loss  in  the  transportation  of  flowers  from  southern  to  northern 
regions  is  reckoned  at  about  50%  ;  that  of  oranges,  at  30%.^ 

Domestic  factories  whose  production-cost  is  less  than  the  foreign 
price  of  the  commodity  as  increased  by  the  amount  of  the  additional 
charges  in  question  are  in  any  case  able  to  maintain  themselves, 
accordingly,  under  a  system  of  free  trade.  In  addition  to  the 
fact  that  the  commodity  may  be  produced  at  home  at  varying  de- 
grees of  expense,  there  is  another  reason  why  foreign  production, 
in  spite  of  its  adaptation  to  export  purposes,  is  able  in  many  cases 
to  supplant  domestic  production  only  in  part.  Thus,  when  a  foreign 
country  exports  a  commodity,  it  must  expand  its  production  of  this 
commodity.  But  as  the  expansion  of  a  branch  of  production  results, 
ceteris  paribus,  in  an  increase  of  the  cost  of  the  quota  produced 
under  the  most  unfavorable  conditions,  exportation  necessarily  in- 
volves, as  a  rule,  an  increase  in  the  maximum  expenses  of  the 
exporting  State.  If,  e.  g.,  the  maximum  cost  required  for  meeting 
Germany's  need  for  iron  amounts  to  35  shillings  per  hundred  kilos, 
and  the  maximum  expenditure  on  that  part  of  Austro-Hungarian 
production  required  for  meeting  the  home  demand  were  45  shillings, 
it  by  no  means  follows  that  the  German  ironworks  could  supply  at 
35  shillings,  in  addition  to  the  German  demand,  the  whole  of  the 
Austro-Hungarian  demand  as  well.  As  a  result  of  exportation  of 
German  iron  to  Austria-Hungary,  the  maximum  expenses  and  prices 
prevailing  in  Germany  would  ordinarily  be  augmented.  If  in  conse- 
quence of  the  graduated  conditions  of  production  a  part  of  the 
Austro-Hungarian   iron-foundries    could   maintain    themselves    even 

iln  many  cases,  however,  the  transportation-cost  from  foreign  points  to 
certain  domestic  rcpions  is  less  than  in  the  case  of  consignments  from  more 
remote    domestic    factories. 


IMPORTS  AND  DOMESTIC  PRODUCTION  373 

at  35  shillings,  a  still  larger  proportion  of  Austrian  ironworks  could 
maintain  their  production  at  the  German  price  (now  increased  to 
a  rate  above  35  shillings),  in  spite  of  importation.  The  domestic 
plants  whose  operating-costs  are  less  than  the  foreign  prices  as 
increased  in  consequence  of  exportation  cannot  be  supplanted  by 
means  of  foreign  competition. 

The  fact  that  even  under  a  system  of  free  trade  the  production 
of  a  commodity  is  frequently  possible,  in  spite  of  the  superior  ad- 
vantages of  foreign  competition,  is  as  a  rule  attributed  to  various 
factors,^  mostly  non-economic,  or  to  changes  in  monetary  value. 
If  every  State  could  produce  any  quantity  of  a  commodity  it  liked 
at  the  minimum  cost  at  which  this  commodity  is  manufactured 
within  its  territory,  there  would  be  no  other  explanation  for  this 
phenomenon.  But  a  study  of  the  actual  conditions  shows  that  in 
most  cases,  where  only  a  portion  of  the  domestic  production  of  the 
commodity  in  question  is  supplanted,  by  far  the  most  important 
reason  is  to  be  found  in  the  fact  that  all  domestic  plants  which  oper- 
ate at  a  loiver — or,  at  least,  not  at  a  higher — cost  of  production 
than  those  factories  abroad  which  compete  on  the  most  unfavorable 
terms  in  supplying  the  foreign  and  the  export-demand  are  able  to 
maintain  themselves  without  a  protective  tariff. 

Experience  shows  that  a  great  many  commodities  which  are 
imported  from  abroad  are  produced  at  the  same  time,  in  larger  or 
smaller  quantities,  at  home.  This  is  true  not  only  of  commodities 
subject  to  duty,  but  also  of  those  which  are  imported  duty-free. 
Fruit,  vegetables,  wool  and  f!ax,  iron  ore  and  iron  pyrites,  posters 
and  calendars,  etc.,  are  shipped  duty-free  into  Austria-Hungary, 
and  at  the  same  time  produced  at  home.  In  this  connection,  differ- 
ences of  quality  play  an  important  role ;  but  it  is  unquestionably 
true  that  even  products  of  equal  or  equivalent  quality  are,  on  the 
one  hand,  imported  and,  on  the  other,  produced  at  home.  We  note 
the  importation  into  Great  Britain  of  numerous  agricultural  and 
industrial  products  and,  at  the  same  time,  the  production  -in  Great 
Britain  of  most  of  these  same  commodities,  and  this  without  any 

^  Such  as  the  "  instinctive  reactions  of  historically  developed  national  in- 
dividualities, seeking  to  maintain  themselves  in  their  present  sphere  of  ac- 
tivity." 


374 


SCHULLER 


protective  tariff.^  Equally  conclusive  is  the  circumstance  that  a 
great  many  commodities  subject  to  protective  tariff  are  partly 
imported  and  partly  produced  by  the  importing  State.  We  shall 
not  enlarge  on  this  phenomenon,  as  we  are  here  concerned  with  the 
effects  of  free  trade. 


* 


As  a  result  of  the  fact  that  the  same  commodity  is  produced  in 
the  same  economic  field  at  various  degrees  of  expense,  and  that  the 
price  must  correspond  to  the  maximum  expense  in  the  long  run,  it 
follows,  to  repeat,  that  commodities  may  be  produced  at  home,  even 
under  a  system  of  free  trade,  at  the  same  time  that  foreign  countries 
are  in  a  position  to  export  these  goods  to  the  country  in  question. 
But  it  would  be  incorrect  to  assume  thereby  that  it  is  impossible 
to  suppress  the  domestic  production  of  any  commodity  completely 
as  a  result  of  foreign  competition.  The  domestic  production  of  a 
commodity  which  foreign  countries  are  in  a  position  to  export  to 
us  can  be  maintained  only  when  partial  quantities  of  this  commodity 
are  produced  at  home  more  cheaply  than  the  maximum  foreign  cost. 
The  complete  suppression  of  domestic  production  of  a  commodity 
by  means  of  foreign  competition  takes  place  when  the  foreign 
factories  are  able  to  supply  the  entire  domestic  demand  at  a  price 
lower  than  the  production-costs  of  the  domestic  factories  operating 
under  the  most  favorable  conditions. 


* 


1  AMOUNTS  IN  GREAT  BRITAIN,  ACCORDING  TO  GIFFEN 


Grain  and  meal     .     . 

Potatoes 

Vegetables  .    .    .    . 

Meat 

Butter,  cheese,  milk 


Imports 

Domestic 
Production 

Million  Pounds  Sterling 

36. 

10. 

1.6 

21.4 

2.5 

23-5 

•      48. 

82. 

35- 

35- 

IMPORTS  AND  DOMESTIC  PRODUCTION  375 

Refutation  of  the  Assertion  that  the  Total  Domes- 
tic Production  cannot  be  diminished  as  a  Result  of 

Importation 

In  all  cases  where  the  essential  conditions  for  the  complete  sup- 
pression of  domestic  production  of  a  commodity  by  means  of  foreign 
competition  are  absent,  the  commodity  in  question  is  produced  at 
home,  even  under  a  free-trade  system ;  and  the  explanation  of  this 
fact  requires  neither  non-economic  factors  nor  a  change  of  monetary 
value.  That  portion  of  the  domestic  production  of  a  commodity, 
however,  whose  cost  of  manufacture  exceeds  the  maximum  costs  of 
foreign  production  established  under  a  system  of  free  trade  is  actu- 
ally supplanted  in  consequence  of  importation.  In  extreme  cases, 
domestic  production  in  its  entirety  is  made  impossible  by  reason 
of  importation.  Regardless  of  whether  the  domestic  branch  of  pro- 
duction is  partially  or  wholly  suppressed,  in  any  case  an  actual 
diminution  occurs  in  the  total  production  of  the  State. 

The  advocates  of  free  trade  maintain  that  their  system  cannot 
diminish  domestic  production,  but  that  compensation  is  offered,  for 
the  falling  off  in  the  production  of  a  commodity  in  consequence  of 
foreign  competition,  by  the  fact  of  the  increased  production  of 
other  commodities.  This  assertion  is  based  primarily  upon  the 
claim  that,  in  every  State,  there  is  a  definite  quantity  of  produc- 
tive forces — land,  capital,  and  labor — which  on  the  whole  are 
always  actually  employed  for  productive  purposes,  the  units  dis- 
placed from  one  branch  of  industry  being  drained  off  into  the 
channels  of  other  productive  branches  for  which  the  home-country 
affords  relatively  more  favorable  conditions.  The  sum  total  of 
production  according  to  this  theory  is  not  diminished,  but  rather — 
by  virtue  precisely  of  these  more  favorable  conditions  of  production 
— increased.  According  to  this  view,  a  diminution  of  domestic 
production  can  occur  only  in  consequence  of  emigration  of  the 
productive  factors,  which,  however,  as  a  matter  of  fact,  is  held 
not  to  occur. 

This  theory  rests  upon  two  suppositions :  ( i )  the  assumption  that 
no  portion — economically  considered — of  the  given  productive 
forces  can  fail  to  be  utilized;    (2)  the  assertion  that,  through  the 


376  SCHULLER 

operation  of  free  trade,  labor  and  capital  are  devoted  to  those 
branches  of  production  for  which  the  relatively  most  favorable  con- 
ditions prevail.  We  shall  consider  only  the  former  premise,  as  this 
constitutes  the  sole  basis  for  the  conclusion  that  the  sum  total  of 
production  is  not  susceptible  of  diminution  by  reason  of  free  impor- 
tation ;  the  second  assumption  being  that  the  totality  of  production 
is  not  only  not  diminished,  by  freedom  of  importation,  but  is  actu- 
ally increased,  by  reason  thereof. 

Adam  Smith  did  not  fail  to  recognize  the  fact  that  the  means  of 
production  of  a  given  country  are  exploited  in  different  degrees, 
according  as  the  sum  total  of  economic  activity  is  increasing,  dimin- 
ishing, or  constant.  But  in  his  treatment  of  economic  questions,  he 
proceeded  on  the  assumption  that  all  the  available  productive  units 
are  always  being  fully  utilized,  and  that  importation  does  not 
operate  to  limit  these  forces,  but  serves  merely  to  divert  them  from 
one  branch  of  production  to  another.  Smith  assumes,  further,  that 
the  inherent  possibility  of  the  emigration  of  productive  factors  does 
not  offer  a  relevant  consideration.  Ricardo — although  he,  too,  is 
well  aware,  where  it  is  not  a  question  of  trade  policy,  that  two  States 
which  are  equally  well  equipped  with  productive  factors  may  never- 
theless undergo  a  different  course  of  economic  development — has 
nevertheless  formulated  very  clearly  the  theory'  that  the  produc- 
tion which  takes  place  in  a  given  State  represents  a  given  quantity 
that  is  determined  b}^  the  existing  means  of  production,  and  accord- 
ingly cannot  be  diminished  by  reason  of  importation.  This  is 
expressed,  with  great  precision,  in  his  well-known  illustration.  If 
wine  and  cloth  are  produced  in  Great  Britain  at  a  greater  cost  of 
labor  than  in  Portugal,  the  disparity  to  the  detriment  of  Great 
Britain  being  greater,  however,  in  the  case  of  the  wine  than  in  that 
of  the  cloth,  then  on  the  establishment  of  free  trade  Great  Britain 
will  continue  to  manufacture  cloth,  and  do  so  to  the  extent  repre- 
sented by  the  fact  that  all  the  productive  forces  previously  at  the  dis- 
posal of  wine  producers  will  be  utilized  in  the  manufacture  of  cloth. 

This  theory  has  been  opposed  by  List,  in  his  detailed  discussion 
of  the  evolution  of  productive  forces:  "It  is  wholly  inert  natural 
forces — natural  resources  wholly  devoid  of  value — to  which  vitality 
and  value  are  imparted  through  the  establishment  of  a  factory 
force  in  an  agricultural  nation."    This  sound  and  significant  basic 


IMPORTS  AND  DOMESTIC  PRODUCTION  377 

conception  of  List's  was,  however,  very  mucli  obscured,  in  conse- 
quence of  the  theoretical  disguise  in  which  it  was  presented.  That 
is,  to  the  ''theory  of  exchange-values,"  he  opposed,  as  everyone 
knows,  the  "theory  of  productive  forces":  "By  means  of  importa- 
tion, the  exchange-values  at  the  disposal  of  the  population  are  in- 
creased, in  consequence  of  the  lowered  costs  of  consumption ;  while 
the  productive  forces,  by  reason  of  the  suppression  of  domestic 
production,  are  diminished."  This  theory  is  untenable,  as  a  dimi- 
nution of  the  productive  forces  carries  with  it  a  depreciation  of 
exchange-values,  which,  of  course,  are  created  only  through  the 
operation  of  the  productive  forces.  In  addition  to  this  fallacious 
theory.  List  made  the  further  mistake  of  admitting  the  validity, 
with  reference  to  a  large  portion  of  economic  activity  covering  the 
whole  field  of  agriculture,  of  the  theory,  otherwise  rejected  by  him, 
that  the  productive  forces  are  always  fully  utilized.  According  to 
his  theory,  agricultural  production  cannot  be  diminished  in  conse- 
quence of  permitting  the  free  importation  of  its  products.  This 
theory  List  sought  to  confirm  by  reference  to  the  alleged  fact  that 
manufactures  are  promoted  by  free  trade  in  agricultural  products 
— a  circumstance  which,  considering  the  importance  of  industrial 
consumption  from  the  standpoint  of  agriculture,  is  said  to  redound 
indirectly  to  the  advantage  of  the  latter.  He  claimed,  further,  that 
these  indirect  effects  of  free  trade  in  agrarian  products  are  of 
greater  importance  to  agriculture  than  are  the  direct  effects. 

The  argument  that  domestic  production  is  not  susceptible  of 
diminution  by  means  of  importation,  owing  to  the  fact  that  the  total 
productive  activity  of  every  State  represents  a  fixed  quantity  deter- 
mined by  the  existing  productive  forces,  and  that  the  productive 
factors  displaced  from  one  branch  of  industry  are  merely  diverted 
to  another,  still  represents  one  of  the  main  contentions  of  the 
advocates  of  free  trade.  It  is  opposed,  however,  by  the  fact  that 
the  productive  forces  of  a  State  are  exploited  in  very  different 
degrees — or  not  at  all.    The  physical  agents  of  an  economic  nature,^ 

iJn  contradistinction  to  the  natural  forces  which  are  available  in  greater 
amounts  than  those  which  are  utilized— such  as,  e.g.,  the  natural  forces  which 
operate  in  machines,  the  air,  and,  according  to  circumstances,  those  mentioned 
above.  We  speak  here  of  economic  natural  forces,  which  exist  in  smaller  quan- 
tities than  are  required  for  use,  and  which  are  accordingly  conserved. 


378  SCHULLER 

—  fertile  soil,  deposits  of  coal,  ore,  and  minerals,  and  water-power, — 
constitute  the  most  sharply  defined  productive  factor,  as  they  cannot 
be  increased.  Nevertheless,  no  country  exploits  them  to  their  maxi- 
mum capacity,  but  every  State  has  them  at  its  disposal  for  the 
purpose  of  expanding  the  branches  of  production  for  which  they 
are  required.  Almost  all  countries  have  witnessed,  during  the  last 
century,  a  great  increase  in  agricultural  production,  in  the  amount 
of  grain  produced — as  in  the  case  of  field-crops  and  garden-produce 
in  general — in  stock-raising,  and  in  mining;  and  this  increase  still 
continues.  The  economic  physical  agents  required  for  this  purpose 
have  been  available  and  are  still  accessible. 

The  foregoing  has  served  to  prove  more  than  is  necessary  for  the 
refutation  of  the  theory  that  the  economic  natural  forces  available 
in  a  given  State  are  always  actually  utilized.  That  this  view  is 
unsound  is  seen  in  the  very  fact  that  it  is  at  least  possible  for 
a  portion  of  these  forces,  in  a  given  country,  to  remain  unde- 
veloped. It  is  thus  incorrect  to  assert  that  all  the  physical  agents, 
recourse  to  which  is  hindered,  in  a  given  branch  of  production, 
by  reason  of  foreign  competition,  are  utilized  in  another  branch  of 
industry. 

Just  as  in  the  case  of  the  utilization  of  the  forces  of  nature,  and 
in  equal  measure,  is  it  untrue  to  say  that  the  active  working-force 
of  a  country  constitutes  a  fixed  quantity  which  determines  the 
expansion  of  production  as  a  definite  value  that  cannot  be  dimin- 
ished in  consequence  of  foreign  competition.  That  this  is  not  the 
case  is  seen  in  the  very  fact  that  the  number  of  domestic  workers 
may  be  increased  by  immigration  from  abroad  and  diminished  by 
emigration.  Migration  on  the  part  of  the  workers  is  hindered  by 
many  obstacles,  the  most  important  of  which  is  the  natural  attach- 
ment of  human  beings  to  their  home.  Nevertheless  migration  plays 
an  important  role.  America,  South  Africa,  Australia,  the  Rhineland, 
the  industrial  regions  of  German  Bohemia  and  of  Russia,  all  have 
experienced  a  great  increase  in  the  number  of  available  workers 
in  consequence  of  immigration  ;  while  Ireland,  east  Germany,  Gali- 
cia,  Italy,  have  lost  many  workers  through  emigration.  The  United 
States  of  America,  during  the  period  from  1820  to  1900,  has  wit- 
nessed an  increase  of  population  amounting  to  more  than  twenty 
million  persons  in  consequence  of  immigration.    Most  of  the  Russian 


IMPORTS  AND  DOMESTIC  PRODUCTION  379 

industries  have  been  established  by  foreign  engineers,  technicians, 
and  workers.  Even  now,  two-thirds  of  the  directors  of  Russian 
cotton-mills  and  one-third  of  the  technical  workers  of  Russian  fac- 
tories in  general  are  foreigners.  Balfour  rightly  remarks :  "  It  is 
assumed  .  .  .  that  the  British  manufacturer  adheres  to  his  country 
and  changes  his  business.  But  he  may  choose  the  other  alternative. 
He  may  adhere  to  his  business  and  {qua  manufacturer)  change  his 
country."  We  thus  see  the  incorrectness  of  the  very  presupposition 
of  the  free-trade  theory,  viz.,  that  labor  and— as  we  shall  see 
directly — capital  do  not  suffer  emigration  or  immigration  to  a 
considerable  extent.^  The  mobility  of  these  factors,  owing  to  mod- 
ern economic  conditions, — especially  those  of  transportation  and 
intercommunication, — ^has  increased  far  beyond  the  point  that  could 
be  foreseen  by  Smith  and  his  disciples.  Of  still  greater  importance, 
however,  is  the  circumstance  that  migration  of  the  factors  of  pro- 
duction by  no  means  constitutes,  as  the  economists  of  that  school 
assume,  the  only  way  in  which  the  productive  activity  of  a  country 
may  be  increased  or  diminished. 

Quite  apart  from  the  factor  of  migration,  the  active  working-force 
in  any  country  may  experience  a  great  augmentation  or  diminution. 
According  to  the  nature  of  the  facilities  for  earning  a  livelihood,  a 
considerable  or  inconsiderable  portion  of  the  workers  of  a  country 
are  unemployed.  The  extent  to  which  this  is  true  is  at  present 
decidedly  underestimated,  and  will  be  fully  appreciated  and  cor- 
rectly estimated  only  upon  the  completion  of  a  comprehensive 
system  of  unemployment  statistics — such  as  are  unavailable  at  the 
present  time.  Of  equal  importance  is  the  question  as  to  how  these 
workers  who  are  actually  employed  are  utilized.  They  may  be  fully 
or  only  partially  active,  according  as  the  factories  find  a  larger  or  a 
smaller  outlet  for  their  products.  The  workers  may,  furthermore, 
be  employed  in  a  capacity  commensurate  with  their  qualifications, 
or  they  may  be  engaged  in  work  in  connection  with  which  their 
skill  is  not  brought  into  play,  owing  to  the  fact  that  there  is  no 
corresponding  demand  for  the  products  of  skilled  labor. 

^In  addition  to  this  theory,  still  another  view  prevails  among  advocates  of 
free  trade.  They  admit  that  labor  and  capital  mipjratc,  but  declare  all  such 
cases  of  migration,  as  effected  by  foreign  competition,  to  be  advantageous,  from 
the  international  standpoint. 


38o  SCHULLER 

The  amount  of  work  performed  in  a  given  time  by  any  worker 
differs  greatly  according  to  whether  he  exerts  himself  or  not.  By 
virtue  of  higher  pay  and  more  favorable  conditions  of  work,  the 
amount  of  work  performed  may  be  greatly  increased,  and  the  zeal 
and  capacity  for  labor  on  the  part  of  the  present  generation,  as 
well  as  the  physical  and  mental  capacity  of  the  coming  generation, 
may  be  markedly  augmented.^ 

In  still  smaller  measure  than  in  the  case  of  ordinary  labor  is  it 
true  to  say  that  the  forces  represented  by  skilled  labor  are  always 
utilized.  The  capacity  for  the  establishment  and  improvement  of 
factories,  in  particular,  asserts  itself  very  diversely  according  to  the 
circumstances  of  domestic  opportunities  for  earning  a  livelihood. 
And  it  is  precisely  the  greater  or  lesser  degree  of  utilization  of  execu- 
tive capacity  that  exerts  an  essential  influence  upon  the  amount  of 
domestic  production.  The  more  such  capacity  is  translated  into 
activity,  the  greater  are  the  opportunities  for  work  that  are  created, 
the  more  effectively  are  the  available  labor-forces  applied,  and  the 
more  advantageous  are  the  working-facilities  devised ;  while,  in  the 
opposite  case,  labor  is  wasted  on  every  hand.  The  effectiveness  of 
the  labor-forces  of  a  country  may,  in  consequence  of  the  circum- 
stances adduced,  be  greatly  increased  or  markedly  reduced. 

It  is  equally  erroneous  to  assert  that  domestic  production  repre- 
sents a  fixed  quantity  owing  to  its  expansion's  being  determined  by 
the  quantity  of  existing  capital.  If  corresponding  opportunities  for 
gain  exist  within  a  country,  capital  is  attracted  from  foreign  coun- 
tries. In  spite  of  the  difficulties  which  stand  in  the  way  of  the 
migration  of  capital,  this  nevertheless  occurs  to  a  considerable  ex- 
tent. In  Austria  many  enterprises  were  consummated  with  foreign, 
especially  German,  capital, —  often  as  branches  of  foreign  enter- 
prises. The  amount  of  foreign  capital  invested  in  Austria-Hungary 
is  estimated  at  ten  billion  kronen.  Approximately  two  billion  pounds 
of  English  capital  has  been  invested  abroad, —  in  almost  all  countries. 
The  amount  of  German  capital  lent  to  foreign  countries  is  estimated 
at  eighteen  billion  marks.    Capital  of  England,  Germany,  France, 

^The  possibility  of  increasing  the  amount  of  work  performed  was  clearly 
proved  in  connection  with  the  substitution,  for  socage,  of  the  freer  labor  of 
peasants  and  wage-earners. 


IMPORTS  AND  DOMESTIC  PRODUCTION  381 

Belgium,  and  other  States  is  invested  in  many  enterprises  in  the 
United  States,  Russia,  the  Balkan  States,  Asia,  and  Africa. 

But  even  the  domestic  capital  available  for  production  in  a  given 
country  does  not  constitute  a  fixed  amount.  The  proceeds  of  all 
the  economic  enterprises  which  constitute  the  subject-matter  of 
political  economy  are  utilized  partly  for  purposes  of  consumption 
and  partly  for  further  production.  The  relation  between  the  two 
varies.  The  savings  of  the  past  which  may  go  to  make  up  capital 
may  be  differently  applied.  Consumption  and  production  compete 
for  their  portion.  It  is  possible,  on  the  one  hand,  for  the  entire 
proceeds  of  the  period  of  production  to  be  consumed — in  fact,  for 
the  capital  derived  from  earlier  periods  to  be  diminished  for  purposes 
of  consumption ;  while,  on  the  other  hand,  this  capital  may  remain 
intact,  and  even  be  increased,  to  the  extent  of  a  larger  or  smaller 
portion  of  the  returns  of  each  new  period  of  production. 

Another  circumstance  of  great  importance  is  to  be  found  in  the 
fact  that  the  same  amount  of  capital  may  lead  to  varying  degrees 
of  production,  according  to  whether  the  technique  is  more  nearly 
or  less  nearly  perfect,  and  according  as  the  capital  is  employed  for 
the  production  of  articles  intended  for  immediate  consumption  or 
for  that  of  machines  and  other  capitalistic  equipment  by  means  of 
which,  with  the  same  amount  of  capital  and  labor,  a  larger  volume 
of  commodities  is  created.^  The  amounts  of  capital  already  invested 
may,  moreover,  be  utilized  in  different  degrees.  Although  a  factory, 
e.  g.,  represents  a  definite  amount  of  capital,  it  is  associated,  never- 
theless, with  varying  degrees  of  productive  force,  according  as  it  is 
working  at  partial  or  maximum  capacity.  Thus,  it  is  true  that 
domestic  plants  which  for  varying  reasons  (one  of  which  is  precisely 
the  effect  of  foreign  competition)  are  unable  to  operate  at  their 
maximum  capacity  represent  an  amount  of  capital  which  from  the 
mechanical  standpoint  is  unchanged ;  yet  their  capital  is  from  the 
economic  standpoint  diminished.  Foreign  competition  may  destroy 
domestic  capital ;  while  by  the  limitation  of  this  competition  domestic 

lit  may  be  asserted  with  confidence  that  there  is  not  a  single  branch 
of  production  whose  proceeds,  based  on  the  current  method  of  production, 
could  not  be  considerably  increased;  and  this  without  a  single  new  invention — 
simply  by  the  insertion  of  intermediate  capitalistic  links  which  have  long  been 
familiar.   Bohm-Bawerk,  Kapital  u.  Kapitalzins,  2d  ed.,  Vol.  II,  p.  91. 


382  SCHULLER 

capital  may  be  increased.  A  further  fact  to  be  considered  is  that 
a  portion  of  the  commodities  utilized  or  consumed  in  the  course  of 
production  are  produced  during  the  period  of  production  itself. 
The  amount  of  these  commodities  is  a  portion  of  the  production  as 
a  whole.  Raw  materials  and  semi-manufactures,  moreover,  may  be 
procured  from  abroad  even  more  readily  than  liquid  assets,  being 
paid  for  out  of  the  proceeds  of  production.  This  brings  us  to  the 
factor  of  credit,  whereby  the  amount  of  capital  available  for  domestic 
production  may  be  increased  in   varying  degrees. 

Although  the  productive  factors  of  every  State  are  limited,  the 
assertion  is  unwarranted  that  there  are  definite  maximum  and  mini- 
mum points  which  these  factors  cannot  appreciably  exceed  or  fall 
short  of,  respectively,  and  that  consequently  the  importation  of 
foreign  goods  effects  only  a  displacement  but  not  a  diminution  of 
domestic  production.  The  possibilities  of  development  of  the  pro- 
ductive forces  of  a  given  territory  are,  on  the  contrary,  very  diverse ; 
and  foreign  competition  may  lead  to  a  retardation  of  domestic  pro- 
duction, hampering  the  utilization  of  available  but  as  yet  unexploited 
productive  factors. 

Not  only  is  it  true  that  in  consequence  of  foreign  competition 
domestic  forces  may  remain  unexploited  or  may  be  less  adequately 
utilized,  but,  in  the  second  place,  we  must  take  into  account  the 
further  fact  that  the  transfer  of  productive  factors  from  a  given 
branch  of  industry — from  which  they  have  been  supplanted  by 
reason  of  importation — to  another  branch,  either  does  not  occur  at 
♦  all,  or  else  takes  place  at  a  considerable  loss.  Available  means  of 
production  that  can  be  utilized  only  for  the  manufacture  of  certain 
definite  commodities  cannot  be  used  at  all,  and  lose  their  status  as 
economic  commodities,  when  the  production  of  these  goods  is  ren- 
dered impossible  through  the  importation  of  these  same  commodi- 
ties. Thus  the  forces  represented  by  the  resources  of  the  soil  would 
remain  undeveloped  if  the  entire  production  of  a  given  State,  based 
on  the  exploitation  of  the  soil,  were  supplanted  as  a  result  of  impor- 
tation. Machines  and  factory  facilities  adapted  only  to  the  produc- 
tion of  a  definite  article  cannot  be  transferred  to  another  branch 
of  production.  It  frequently  happens,  furthermore,  that  means  of 
production  suffer  partial  depreciation,  in  the  process  of  transition. 
In  case  managers,  technicians,  weavers,  spinners,  are  compelled  to 


IMPORTS  AND  DOMESTIC  PRODUCTION  383 

take  up  a  new  line  of  employment,  the  skill  which  they  have  ac- 
quired is  lost  as  an  economic  value.  These  consequences  of  a 
transition  from  a  system  of  protection  to  one  of  free  trade,  and 
also  under  a  permanent  system  of  free  trade,  may  by  reason  of  the 
changed  conditions  of  competition  involve  a  very  considerable  dim- 
inution of  domestic  production.  This  phenomenon,  however,  though 
it  has  been  frequently  emphasized,  appears  to  be  only  a  secondary 
factor  as  compared  with  the  fact — demonstrated  by  the  foregoing 
discussion — that  importation  may  effect  a  permanent  diminution  in 
domestic  production,  or  at  least  may  serve  to  hamper  its  expansion. 


The  Fallacy  of  the  Theory  that  Production  cannot  be 

diminished  by  importation  because  exportation  expands 

IN  Proportion  to  Importation 

The  proponents  of  free  trade  maintain,  further,  that  the  volume 
of  imports  and  that  of  exports  in  a  given  country  coincide  on  an 
average, — apart  from  the  exceptions  due  to  international  indebted- 
ness,—  and  that,  consequently,  increased  importation  must  lead  to  a 
corresponding  increase  in  exportation — perhaps  through  a  change  in 
monetary  values.  In  the  same  degree,  accordingly,  as  domestic 
branches  of  production  are  supplanted  through  importation,  the 
production  of  commodities  for  export — so  it  is  argued — must  in- 
crease, with  the  result  that  domestic  production  as  a  whole  is  not 
susceptible  of  diminution  by  reason  of  foreign  competition.^ 

This  mechanical  conception  of  commercial  intercourse  is  errone- 
ous. Let  us  assume,  for  the  moment,  that  an  expansion  of  the  volume 
of  imports  must  actually  result  in  a  corresponding  increase  in  the 
sum-total  of  exports :  there  is,  however,  absolutely  no  proof  that  the 

1  Sidney  and  Beatrice  Webb  (Theory  and  Practice  of  the  English  Trade- 
Unions,  II,  p.  261):  "Without  penetrating  to  the  depths  of  the  orthodox  theory 
of  international  trade  or  of  the  mysteries  of  foreign  exchange-rates,  everyone 
will  admit  that  an  increase  of  our  total  volume  of  exports  tends — as  is  shown 
by  experience — to  increase  in  equal  measure  the  sum-total  of  our  imports." 
Brentano,  The  Free-Trade  Argument,  Berlin,  iqoi,  p.  9:  "If  our  demand 
for  an  annual  supply  of  Russian  rye,  to  the  value  of  sixty  to  seventy  million 
marks,  ceases,  owing  to  the  fact  that  we  ourselves  produce  the  required  amount 
of  rye,  foreign  countries  will  no  longer  be  able  to  buy  from  us  the  goods  by 
means  of  which  we  have  hitherto  paid  for  Russian  rye." 


384  SCHULLER 

increased  volume  of  exports  signifies  an  increase  in  domestic  produc- 
tion. The  volume  of  exports  may  be  augmented  at  the  same  time  that 
production  is  being  maintained  at  the  same  level,  or  is  even  falling 
off — a  larger  portion  of  domestic  commodities  being  exported  than , 
hitherto,  and  a  smaller  portion  being  consumed  at  home.  If,  e.  g., 
Austria's  entire  demand  for  industrial  commodities  were  supplied 
by  foreign  countries,  and  Austrian  manufactures  accordingly  were 
suppressed,  the  demand  throughout  Austria  for  agricultural  materials 
and  foodstuffs  would  necessarily  be  so  diminished,  in  consequence 
of  the  falling  off  of  consumption  based  on  industrial  needs,  that  the 
price  of  these  commodities  would  be  considerably  depressed,  while 
Austria's  exportation  of  agricultural  products  would  increase.  In- 
creased exportation  in  this  case  would  accordingly  be  brought  about 
through  the  diminution  of  the  domestic  demand,  but  without  any 
expansion  in  the  domestic  production  of  agricultural  products.  The 
increase  in  the  volume  of  exports  which  thus  takes  place  may  serve 
to  offset  the  increase  in  importation ;  but  this  carries  with  it  no 
expansion  of  domestic  production,  and  accordmgly  offers  no  com- 
pensation for  the  decline  in  production  due  to  increased  importation. 

The  same  thing  is  true  of  the  partial  or  complete  supplanting,  and 
of  the  hampering  of  the  development,  of  any  domestic  branch  of 
industry,  in  consequence  of  foreign  competition.  In  such  cases  the 
consumption  of  the  domestic  materials  in  question,  and  of  the  com- 
modities required  by  the  workers,  does  not  take  place,  owing  to 
the  fact  that  the  branch  of  industry  in  question,  in  consequence  of 
importation,  is  either  not  operating  at  all  or  else  only  in  a  reduced 
capacity.  The  prices  of  the  goods  which  would  have  found  a  market 
in  connection  with  the  suppressed  industry  undergo  a  domestic 
decline ;  and  these  commodities  are  thus  liberated  for  exportation  in 
greater  quantities,  serving  to  pay  for  the  greater  volume  of  imports. 

Apart  from  the  process  which  we  have  just  discussed,  the  increase 
in  exportation  which  keeps  pace  with  the  growing  volume  of  imports 
may  assume  the  following  form  also.  In  line  with  our  increased 
volume  of  importation  and  the  consequent  expansion  of  production 
on  the  part  of  the  foreign  country  which  is  exporting  commodities 
to  us,  that  country  experiences  an  increased  demand  for  different 
commodities,  including  as  a  rule  the  goods  which  it  procures  from 
us.    Thus  our  own  exportation  and  production  are  augmented,  but 


IMPORTS  AND  DOMESTIC  PRODUCTION  385 

only  by  an  amount  which  represents  a  fraction — often  an  absolutely 
negligible  proportion — of  the  sums  represented  by  the  increased 
volume  of  imports  and  the  decline  of  domestic  production.  If,  e.g., 
the  exportation  of  woolen  fabrics  from  England  to  Austria-Hungary 
should  increase  by  the  amount  of  fifty  million  kronen,  and  the  Aus- 
trian production  should  suffer  a  corresponding  decline,  the  develop- 
ment of  the  production  of  English  woolen  goods  might,  to  be  sure, 
lead  to  an  increased  demand  for  sugar,  eggs,  and  other  commodities, 
which  we — and,  of  course,  other  countries  as  well  —  export  to  Eng- 
land. But  the  increased  production  on  our  part  occasioned  thereby 
will  represent  only  a  small  part  of  the  sum  of  fifty  million  kronen 
which  corresponds  to  the  increased  volume  of  imports.  Thus  in  case 
increased  importation  does  lead  to  a  corresponding  expansion  of  the 
volume  of  exports,  the  phenomenon  is  traceable  only  in  part — usually 
only  to  a  slight  degree — to  an  augmentation  of  domestic  production. 
Furthermore,  the  importation  of  a  commodity  does  not  necessarily 
increase  the  total  volume  of  imports  of  the  State  in  question — or, 
at  least,  not  by  the  full  amount  of  the  article  under  consideration. 
If,  e.  g.,  foreign  cotton  yarn  is  imported,  thus  supplanting  in  part 
products  of  the  domestic  spinning  industry,  imports  will  to  be  sure 
be  increased  by  the  amount  of  the  spinning  cost  of  the  imported 
cotton  yarn.^  At  the  same  time,  however,  there  will  be  a  diminution 
in  the  importation  of  commodities — such  as  tobacco,  groceries,  meal, 
etc. — consumed  by  the  operatives  of  the  spinning  mills  and  their 
auxiliary  industries.  This  decline  in  importation,  occasioned  by  the 
falling  off  of  consumption,  does  not  of  course  result  in  an  expansion 
of  the  domestic  branches  of  production  in  question— in  so  far  as 
such  commodities  are  produced  at  all  at  home.  Thus  increased 
importation,  in  consequence  of  which  a  portion  of  home  production 
is  suppressed,  may  be  partially  offset  by  a  decline  in  the  importation 
of  other  goods,  which,  however,  fails  to  lead  to  any  expansion  of 
domestic  production.  It  may  be  urged,  on  the  other  hand,  that 
importation  serves  not  only  to  diminish  domestic  production  and  the 
demand  resulting  therefrom,  but  also  lessens  the  cost  of  consumption, 
resulting  thus  in  the  liberation  of  resources  which  may  be  used  to 
increase  the  demand  for  other  commodities.    This  is  true ;  but  it  is 

iQnly  by  this  amount,  because  at  the  same  time  the  importation  of  the  cor- 
responding quantity  of  raw  cotton  comes  to  an  end. 


386  SCHULLER 

only  in  the  case  of  certain  goods  that  the  price  is  reduced  to  a 
considerable  extent  as  a  result  of  importation,  production  meanwhile 
being  only  slightly  reduced ;  while,  in  the  case  of  other  goods,  pro- 
duction is  very  markedly  diminished  but  without  the  price's  being 
appreciably  reduced.  The  importation  of  the  latter  class  of  goods 
is,  on  the  whole,  disadvantageous.  In  this  case,  owing  to  the  extent 
to  which  the  production  of  these  commodities  has  been  suppressed 
and  the  demand  for  materials  and  the  necessaries  of  life  associated 
with  this  production  has  been  reduced,  the  total  consumption  is 
accordingly  diminished  by  an  amount  which  exceeds  the  increase 
due  to  the  reduced  price  of  these  commodities. 

The  foregoing  considerations  lead  to  the  following  conclusions. 
Even  if  one  were  to  admit  the  validity  of  the  proposition  that  on 
an  average — apart  from  exceptions  due  to  international  indebted- 
ness—  the  imports  and  exports  of  a  State  offset  one  another,  this 
nevertheless  would  offer  no  proof  that  the  importation  of  a  com- 
modity leads  to  an  automatic  increase  in  the  home  production  of 
other  goods,  and  that  consequently  domestic  production  as  a  whole 
cannot  be  diminished  by  the  importation  of  foreign  goods.  The 
decline  in  the  domestic  production  of  the  imported  goods,  due  to 
importation,  serves  rather  to  reduce  the  home  demand  for  other 
commodities,  thus  rendering  possible  a  larger  exportation  or  a 
smaller  importation  thereof. 

The  Fallacious  Theory  that  the  Effects  of  Importa- 
tion UPON  Production  are  offset  by  Reason  of  the  In- 
fluence OF  Importation  upon  the  Value  of  Money 

The  argument  that  dom.estic  production  is  not  diminished  by 
reason  of  free  trade,  owing  to  the  fact  that  exports  and  imports 
necessarily  offset  one  another,  is  by  no  means  strengthened  by  rep- 
resenting a  change  of  monetary  values  as  an  intermediary  link  by 
virtue  of  which  the  equalization  occurs.  This  theory,  as  developed 
by  prominent  advocates  of  free  trade,  is  as  follows :  In  case  of  a 
permanent  debit  balance,  it  is  necessary,  in  order  to  balance  the 
account,  for  money  to  be  exported,  which  process  results  in  the  in- 
crease of  domestic  money  values  and  the  depreciation  of  the  prices 
of  commodities.    The  reduction  of  domestic  prices — so  it  is  urged— 


IMPORTS  AND  DOMESTIC  PRODUCTION  387 

results  in  increased  exportation  and  a  smaller  volume  of  imports,  so 
that  the  trade  balance  is  automatically  equalized.  This  leads  to  the 
conclusion  that  domestic  production  cannot  be  diminished  by  reason 
of  importation,  because — so  it  is  alleged — the  decline  in  production, 
due  to  a  preponderance  of  imports,  leads,  through  its  influence  upon 
monetary  values,  to  an  increase  in  the  volume  of  exports  or  to  a  reduc- 
tion of  importation — and  hence  to  an  augmentation  of  production; 
so  that  the  deficit  caused  by  a  preponderance  of  imports  is  overcome. 

In  order  to  throw  light  upon  this  theory,  let  us  set  forth,  briefly, 
the  influences  exerted  by  changes  in  the  value  of  money  upon  foreign 
trade.  Such  changes  may  occur :  ( i )  through  a  change  in  the 
monetary  standard  of  a  given  State  in  relation  to  that  of  other 
States;  this  takes  place  when,  e.g.,  it  is  possible  to  purchase  100 
marks,  hitherto  procurable  at  117  kronen,  for  no  kronen,  or  for 
120  kronen;  (2)  through  a  change  in  the  value  of  the  monetary 
standard  of  a  State,  in  relation  to  the  value  of  commodities,  resulting 
in  a  general  rise  or  depreciation  in  the  prices  of  commodities  through- 
out this  country. 

Let  us  consider  the  first  case.  If  our  monetary  standard  falls,  in 
relation  to  that  of  foreign  countries,  the  foreign  money,  which  we 
receive  in  return  for  our  exports,  represents  a  larger  amount,  in 
terms  of  our  currency,  than  was  represented  by  the  same  amount  of 
foreign  currency  hitherto ;  and  our  volume  of  exports  will,  accord- 
ingly, increase.  The  foreign  country,  on  the  other  hand,  receives, 
to  be  sure,  the  same  amount  of  our  money,  in  return  for  the  goods 
delivered  to  us ;  but  this  money  represents,  in  terms  of  its  currency, 
a  smaller  amount  than  before,  and  the  volume  of  our  imports,  ac- 
cordingly, declines.  The  depreciation  of  our  monetary  standard,  in 
relation  to  that  of  other  States,  accordingly  results,  other  things 
being  equal,  in  increased  exportation  and  decreased  importation. 
The  converse  effects  occur  in  the  event  of  a  rise  in  our  monetary 
standard  in  relation  to  that  of  other  countries. 

Let  us  assume,  e.  g.,  that  one  onza  of  Argentine  money  is  equiva- 
lent to  three  pounds  sterling  of  English  money ;  and  that,  under 
these  circumstances,  wheat  is  exported  from  Argentina  to  England, 
the  Argentine  seller  receiving  for  one  hundred  kilos  of  wheat  one 
pound  sterling,  or  one-third  onza.  Let  us  assume  that  the  Argentine 
currency  depreciates  to  the  point  where  the  exchange  value  of  the 


388  SCHULLER 

onza  is  only  two  pounds  sterling.  The  amount  of  one  pound  sterling, 
which  Argentina  receives  for  one  hundred  kilos  of  wheat,  is  now 
worth  no  longer  one-third  but  one-half  onza — with  the  result,  of 
course,  that  the  volume  of  wheat  exports  consigned  to  England 
necessarily  increases.  If,  on  the  other  hand,  England  sells  cotton 
goods  to  Argentina,  receiving  one  onza  per  piece,  this  was  hitherto 
equal  to  three  pounds  sterling,  whereas  now  one  would  receive  only 
two  pounds  sterling  for  it — with  the  result  that  the  exportation  of 
English  cotton  goods  to  Argentina  is  reduced. 

Changes  in  the  monetary  standard  of  a  given  State  with  relation 
to  that  of  foreign  countries  are  due,  e.  g.,  to  the  fact  that  its  cur- 
rency is  based  on  a  different  metal.  The  relations  obtaining  between 
the  several  monetary  standards  are,  accordingly,  displaced  when  the 
relative  value  of  the  precious  metals  in  question  undergoes  a  change. 
The  depreciation  of  the  value  of  silver,  in  relation  to  that  of  gold, 
results  in  facilitating  exportation  in  those  States  which  have  a  silver 
standard,  and  hampering  the  process  of  importation  into  those 
countries ;  while  in  those  States  which  have  a  gold  standard  the 
converse  occurs. 

There  remains  for  us  to  consider  the  second  case  mentioned :  the 
rise  or  fall  in  the  value  of  the  money  of  a  given  country  relatively 
to  the  value  of  its  commodities.  The  rise  in  the  value  of  money  causes 
a  depreciation  in  the  value  of  commodities  in  proportion  to  foreign 
goods,  with  the  result  that  exportation  is  facilitated  and  importa- 
tion checked.  This  process  requires,  however,  as  one  of  the  pre- 
liminary conditions,  that  the  same  change  shall  not  have  taken  place 
in  the  foreign  countries  with  which  we  have  trade  relations.  If, 
e.  g.,  the  prices  of  Austrian  goods,  in  consequence  of  an  increase  in 
the  value  of  our  currency,  are  reduced  lo^f ,  the  relation  of  monetary 
values  to  commodity  values  elsewhere  remaining  constant,  this  means 
that  domestic  prices  have  fallen  lo  %  in  relation  to  foreign  prices — ■ 
which  results  in  an  increase  in  the  volume  of  exports  and  a  reduction 
in  that  of  imports. 

The  far-reaching  consequences,  for  the  whole  field  of  economic 
life,  induced  by  changes  in  monetary  values  do  not  belong  to  the 
scope  of  this  inquiry.  A  sound  policy  with  respect  to  the  currency 
system  should  unquestionably  aim  at  securing  the  utmost  stability 
for  the   monetary   standard,   striving,   accordingly,    to  prevent   its 


IMPORTS  AND  DOMESTIC  PRODUCTION  389 

either  rising  or  falling.  But  our  interests  are  affected  not  only  by 
such  a  possible  rise  or  fall  in  domestic  money  values  in  relation  to 
commodity  values,  but  also  by  changes  which  occur  in  foreign  coun- 
tries. The  money  value  depreciates  in  relation  to  commodity  values,  * 
in  case  a  country's  medium  of  circulation  is  increased  out  of  pro- 
portion to  the  increased  trade  requirements — e.g.,  in  consequence 
of  large  volumes  of  new  coinage  or  of  extensive  issues  of  paper 
money.  If,  on  the  other  hand,  the  circulation  of  money  is  reduced, 
at  the  same  time  that  trade  requirements  remain  constant  or  are  on 
the  increase,  the  value  of  money  rises  in  proportion  to  commodity 
values.  In  case  such  a  rise  or  depreciation  occurs  universally,  foreign 
trade  is  not  affected  thereby.  But  individual  States  have  often  ex- 
perienced changes  in  money  values  in  marked  degree,  these  changes,  in 
this  case,  exerting  the  effects  in  question.  Thus  Spain  and  Portugal, 
subsequent  to  the  discovery  of  America,  witnessed,  in  consequence  of 
the  importation  of  great  quantities  of  the  precious  metals,  a  very 
marked  monetary  depreciation — a  change  which  failed  to  occur,  in 
the  same  degree,  in  the  other  countries  of  Europe.  This  took  place, 
of  course,  at  a  time  when  foreign  commerce  was  far  from  having 
attained  its  present  importance.  But  even  now,  changes  in  money 
value  occur,  in  relation  to  commodity  values,  either  confining  them- 
selves to  certain  States,  or  making  themselves  felt  more  intensely  in 
these  countries  than  elsewhere.  It  is  particularly  changes  in  money 
value  due  to  the  policy  of  a  given  State  with  reference  to  its  currency 
system  which  are,  as  a  rule,  confined  to  the  State  in  question,  exer- 
cising upon  foreign  trade  the  influences  under  consideration.  But 
without  any  interference  due  to  a  given  policy  with  respect  to  the 
currency  system,  a  marked  rise  in  the  value  of  money  may  take  place 
in  a  given  country,  by  reason  of  greatly  increased  trade  and  monetary 
requirements,  while,  in  other  regions,  this  process  either  does  not 
take  place  at  all,  or  only  in  lesser  degree. 

This  situation  may,  moreover,  arise  in  consequence  of  a  perma- 
nently unfavorable  trade  balance.  In  case  this  is  not  offset  by  a  liabil- 
ity balance  based  on  interest  on  indebtedness,  freight-services,  etc., 
the  sums  which  represent  the  excess  of  imports  over  exports  must 
be  balanced  by  money  payments.  It  is  exactly  this  phenomenon 
upon  which  is  based  the  theory  of  the  freetraders,  to  the  effect  that 
a  permanently  unfavorable  trade  balance,   in  consequence   of  the 


390  SCHULLER 

draining  off,  into  foreign  channels,  of  a  portion  of  the  domestic 
medium  of  circulation,  increases  money  values  in  proportion  to 
commodity  values,  thus  increasing  the  volume  of  exports  and  reduc- 
ing that  of  imports — which,  in  turn,  brings  about  a  corresponding 
augmentation  of  production,  thus  offsetting  the  diminution  in 
production  due  to  importation. 

The  first  objection  to  this  theory  is  that  the  effects  of  an  unfavor- 
able trade  balance,  which  occur — so  it  is  held — in  indirect  fashion, 
through  the  influence  exerted  upon  money  values,  are,  as  a  matter 
of  fact,  partly  prevented  by  the  very  fact  that,  in  consequence  of 
the  immediate  effects  of  the  preponderance  of  the  importation  of 
foreign  commodities — reduction  of  domestic  production  and  of  the 
consumption  dependent  thereon — importation  is  restricted  and 
exportation  increased,  with  the  result  that  the  trade  balance  is  thus 
at  least  partially  equalized,  although,  to  be  sure,  without  over- 
coming the  limitation  of  production  due  to  the  preponderance  of 
imports.  But  even  in  case  the  equalization  of  the  liability  balance 
were  first  brought  about  through  the  relatively  remote  effect  exerted 
upon  money  values — this  would  offer  no  argument  by  way  of  prov- 
ing that  the  equalization  occurs  by  means  of  an  increase  of  domestic 
production.  For  we  have  seen  that  neither  the  expansion  of  the 
volume  of  exports  nor  the  reduction  of  that  of  imports  necessarily 
carries  with  it  the  extension  of  domestic  production — that,  as  a 
matter  of  fact,  exportation  may  increase  and  importation  decline  at 
the  same  time  that  production  remains  constant  or  diminishes. 
Accordingly,  even  if  one  overlooks  the  fact  that  a  preponderance 
of  imports  may  be  covered  by  a  transfer  of  a  portion  of  the  national 
property — precious  metals,  credit  instruments,  etc. —  to  foreign 
countries,  or  by  increasing  liabilities ;  and  even  if  it  is  admitted  that 
imports  and  exports  must  offset  one  another,  if  the  immaterial  or 
"invisible"  imports  and  exports  be  taken  into  consideration, — 
this,  nevertheless,  offers  no  proof  that  domestic  production  is  not 
actually  reduced  in  consequence  of  importation. 

The  limitation  of  domestic  production,  effected  by  the  importation 
of  foreign  commodities  which  are  also  susceptible  of  production  at 
home,  can  be  held  in  check,  in  greater  or  less  degree,  only  in  case 
the  domestic  costs  of  production  of  the  commodities  in  question  are 
reduced.    In  the  case  of  a  portion  of  these  costs  of  production,  such 


IMPORTS  AND  DOMESTIC  PRODUCTION  391 

a  reduction  is  not  possible.  If,  e.  g.,  cotton-mills,  threatened  by  for- 
eign competition,  seek  to  cut  their  costs,  they  are  not  in  a  position 
to  lower  the  prices  of  raw  cotton,  as  the  price  of  the  latter  is  un- 
affected by  the  question  as  to  whether  the  demand  for  quantities 
sufficient  to  meet  our  consumption  requirements  is  evinced  by  domes- 
tic or  foreign  spinning  mills.  Nor  is  the  prospect  any  better  for 
procuring  any  more  cheaply  the  spinning  jennies  which  are  imported 
from  England.  There  remain,  accordingly,  only  the  factors  repre- 
sented by  wages  and  profits.  The  strongest  pressure  is  brought  to 
bear,  of  course,  upon  wages.  If  weaving  mills  seek  to  reduce  the 
cost  of  production  of  fabrics,  they  are  able  to  force  down  the  prices 
of  yarn  only  in  so  far  as  the  spinners  transfer  the  pressure  to  their 
operatives  or  reduce  their  own  profits ;  as  for  the  rest,  the  weavers 
too,  in  turn,  can,  for  the  most  part,  only  reduce  wages  and  their 
own  profits.  At  the  same  time,  it  is  possible,  by  virtue  of  the  reduc- 
tion of  the  costs  of  production  thus  attained,  to  maintain,  to  a 
greater  or  less  degree,  the  domestic  production  which  would  other- 
wise be  suppressed  through  foreign  competition.  In  this  case,  in- 
stead of  the  cessation  of  a  portion  of  the  domestic  production,  there 
ensue  lower  profits  and  wages,  and  a  deterioration  in  the  living- 
conditions  of  the  workers,— a  situation  which  carries  with  it  more 
unfavorable  working-conditions  for  the  whole  branch  of  industry, 
serving  to  diminish  the  demand,  on  the  part  of  the  operatives,  for 
articles  of  consumption,  and  thus  to  reduce,  indirectly,  the  produc- 
tion of  other  goods.  The  process  is  similar  to  that  which  occurs  in 
the  case  of  pressure  brought  to  bear  on  an  industry  by  a  more 
favorably  situated  competitor :  instead  of  a  sudden  collapse,  a 
chronic  disease  sets  in,  as  it  were. 

In  consequence  of  the  importation  of  commodities  susceptible  of 
domestic  production,  the  sum-total  of  domestic  production  is,  ac- 
cordingly, diminished,  and  economic  life  thus  impaired.  This  limita- 
tion of  production  is  not  to  be  regarded  as  an  economic  disadvantage 
from  the  standpoint  of  an  abstract  striving  after  the  maximum 
amount  of  production,  but  rather  from  the  standpoint  of  a  diminu- 
tion in  the  quantity  of  commodities  which  is  produced  by  the 
population  and  is  available  for  the  satisfaction  of  its  needs  and  for 
the  fulfillment  of  the  purposes  of  the  State. 


XV 

BRENTANO:  THE  TERRORS  OF  THE  PREDOMI- 
NANTLY INDUSTRIAL  STATE  ^ 

******        #**#^ 

GERMAN  political  economy  has  for  several  decades  been  under- 
going a  radical  transformation.  During  the  last  thirty  years 
manifold  changes  have  become  apparent  in  German  economic  life. 
The  most  important  of  these  changes  is  indicated  by  the  fact  that, 
whereas  from  its  earliest  existence  up  to  the  most  recent  times 
Germany  was  primarily  an  agricultural  state,  during  the  last  thirty 
years  it  has  been  steadily  approaching  the  status  of  a  predominantly 
industrial  state.  Such  a  transition  cannot  be  effected  without  severe 
internal  struggles.  This  process  is  ordinarily  accompanied  by 
changes  in  the  political  importance  of  the  social  classes  which  play 
an  active  role  in  the  different  economic  trades  and  professions.  It 
is  perfectly  natural  for  the  social  classes  which,  in  consequence  of 
the  rapid  growth  of  new  classes,  are  thrust  relatively  into  the  back- 
ground to  make  every  possible  effort  to  retain  their  influence ;  it  is, 
in  fact,  only  human  for  them  to  be  honestly  convinced  that  the  very 
future  of  the  fatherland  is  threatened  by  a  movement  which  rela- 
tively diminishes  the  importance  of  their  own  role,  and  for  them 
to  predict  the  most  gloomy  consequences  on  the  basis  of  the  growing 
strength  of  their  rivals.  On  the  other  hand,  there  is  great  activity 
on  the  part  of  those  who  perceive,  in  the  demand  of  their  opponents 
that  the  natural  course  of  development  shall  be' opposed,  a  threat 
directed  against  the  development  of  their  powers.  This  situation 
thus  gives  rise  to  the  struggle  which  is  being  waged  so  vigorously  on 
both  sides. 

********4e#* 

^Lujo  Brentano   (1844-        ),  Die  Schrecken  des  iiberwiegenden  Industrie- 
staats  (1901),  pp.  5-52. 

392 


TERRORS  OF  THE  INDUSTRIAL  STATE  393 


The  change  which  has  taken  place  and  is  still  in  progress  con- 
sists in  a  transformation  in  the  organization  of  the  German  popula- 
tion according  to  trade  or  occupation.  The  German  vocational 
statistics  serve  to  throw  light  upon  this  question.  If  one  compares 
the  total  agricultural  population  with  that  engaged  in  industry  and 
trade,  one  finds  that  of  every  100  persons  there  were  engaged : 

1882         189s 

In  agriculture 48.29        41.37 

In  industry  and  trade 5i-7i         58.63 

We  see,  accordingly,  that  as  early  as  1882  it  was  no  longer  true 
that  even  one  half  of  those  who  belonged  to  the  three  vocations  in 
question  were  supported  by  agriculture;  by  1895  the  share  repre- 
sented by  agriculture  was  only  41  per  cent.  Since  this  time  the 
population  of  Germany  as  a  whole  has  increased  7.78  per  cent:  in 
the  predominantly  industrial  sections,  18  per  cent;  in  those  districts 
which  are  primarily  agrarian,  on  the  other  hand,  only  5  per  cent, 
showing  in  fact,  in  certain  sections  of  the  country,  an  actual  de- 
crease. If  a  new  census  were  to  be  taken  to-day,  it  would  probably 
show  that,  at  the  present  time,  of  every  100  persons  belonging  to 
the  three  vocational  classes  in  question  more  than  60  are  engaged 
in  manufacturing  and  trade  and  less  than  40  are  supported  by 
agriculture. 

Not  only  vocational  statistics  but,  no  less  clearly,  the  economic 
position  of  the  different  occupations  with  reference  to  one  another, 
and  the  distribution  of  income,  as  well,  show  that  the  center  of 
gravity  of  German  political  economy  is  no  longer  to  be  found  among 
the  agriculturists  and  the  rural  population ;  and  our  whole  financial 
system  is  already  based  on  the  recognition  of  this  fact.  No  one, 
accordingly, — unless  he  be  a  pettifogger, — questions  the  fact  that 
the  German  Empire  is  to-day  primarily  a  manufacturing  state ;  and 
it  is  precisely  this  fact  which  is  responsible  for  the  plaintive  longing 
for  a  return  to  the  organization  of  the  predominantly  agrarian  state. 


94  BRENTANO 

/ 

But  what  is  the  source  of  this  transformation  of  the  German 
Empire  from  a  state  predominantly  agricultural  to  one  predomi- 
nantly industrial  ? 

This  phenomenon  is  the  result  of  the  so-called  law  of  diminishing 
returns  in  agriculture.  It  is  perfectly  evident  that  a  given  surface 
cannot  yield  an  unlimited  quantity  of  produce.  But  long  before 
the  upper  limit  of  productivity  has  been  reached  it  is  found  that  the 
increased  application  of  labor  and  capital  to  the  soil  shows  a  relative 
diminution  in  profit.  The  amount  of  produce  is  susceptible  of  in- 
crease, absolutely  considered ;  but  every  such  increase  is  possible 
only  through  a  relatively  greater  application  of  efforts.  The 
result  is  that  a  growing  population  can  be  supplied  with  foodstuffs 
only  at  greater  expense  than  hitherto.  Temporarily,  to  be  sure, 
the  operation  of  this  law  can  be  neutralized  by  an  improvement  in 
the  technical  methods  of  agriculture.  Technical  progress  may  make 
it  possible  to  increase  the  returns  not  merely  absolutely  but  rela- 
tively as  well,  that  is,  in  proportion  to  the  investment  involved. 
But  such  technical  progress  presupposes  conditions  which  cannot 
always  and  at  every  place  be  fulfilled.  It  can  take  place,  accord- 
ingly, only  to  a  limited  extent ;  and,  even  where  it  does  occur,  its 
tendency  to  reduce  expenses  is  impaired,  if  not  actually  neutralized, 
in  consequence  of  the  increase  in  the  price  of  the  chief  economic 
means  of  production,  the  soil,  due  to  the  increase  in  population. 
Moreover,  as  soon  as  the  technical  improvement  in  question  has  been 
effected,  the  law  of  diminishing  agricultural  returns  again  comes  into 
operation.  Every  further  application  of  labor  and  capital  to  the  soil 
yields,  once  more,  relatively  smaller  returns.  Moreover,  there  is 
always  a  final  limit  to  the  amount  of  produce  which  a  given  area 
can  be  made  to  yield.  Thus,  as  soon  as  the  population  of  a  country 
has  reached  the  point  where  all  the  available  soil  is  under  cultivation, 
the  crops  necessary  for  supplying  this  population  with  food  can  be 
produced  only  at  progressively  greater  expense.  In  connection  with 
manufacturing,  on  the  other  hand,  the  converse  holds  true.  In  this 
field  the  chief  means  of  production  are  represented  by  augmentable 
capital.  As  the  most  important  means  of  production  essential  to  the 
manufacture  of  a  greater  quantity  of  commodities  can  be  obtained 


TERRORS  OF  THE  INDUSTRIAL  STATE  395 

at  the  same  price  as  in  the  case  of  the  production  of  a  smaller  volume 
of  these  commodities,  the  same  is  true  of  the  products  of  the  industry 
in  question.  As  the  ten-thousandth  spinning  machine  can  be  manu- 
factured as  cheaply  as  the  first,  it  follows  that  the  thread  which  it 
has  woven  can  be  furnished  at  as  low  a  price  as  that  spun  on  the 
first  machine.  Nay,  more.  The  ten-thousandth  spinning  machine 
can  be  produced  more  cheaply  than  the  first ;  for  its  manufacture 
on  a  large  scale  costs  less  than  its  production  on  a  small  scale,  and  the 
larger  the  spinning  machines  become  in  consequence  of  the  increase 
of  the  amounts  of  capital  applied  to  their  production,  the  smaller  is 
the  cost  of  a  single  spindle.  It  follows  from  this  that  the  thread  can 
be  supplied  at  progressively  lower  prices.  The  essential  costs  of 
manufacturing  industrial  products  decrease,  accordingly,  in  proportion 
to  the  increase  in  the  application  of  capital  to  their  production. 

There  is  thus  a  tremendous  difference  between  agricultural  and  in- 
dustrial production.  The  principal  means  of  agricultural  production 
are  found  in  the  soil.  This  is  available  in  only  limited  quantities  and 
becomes  increasingly  expensive,  yielding  greater  returns,  furthermore, 
— apart  from  exceptional  cases  over  whose  conditions  man  can  exer- 
cise no  control, — only  at  proportionately  greater  expense.  The  chief 
means  of  industrial  production,  on  the  other  hand,  are  represented 
by  augmentable  capital.  These  factors  can  be  obtained  not  only  at 
a  uniform  expense  but  at  a  progressively  lower  cost ;  and  every 
additional  application  of  labor  and  capital  in  this  field  yields,  ac- 
cordingly, a  greater  return.  It  follows  from  this  that  the  number  of 
human  beings  which  a  country  can  supply  with  food  is  in  inverse 
ratio  to  the  extent  to  which  it  devotes  itself  to  agriculture ;  and  this 
consideration  explains  the  greater  density  of  population  of  manu- 
facturing countries.  Likewise  the  accumulation  of  a  surplus  over 
and  above  the  amounts  invested — that  is,  the  accumulation  of 
wealth — proceeds  far  more  slowly  in  agrarian  districts  than  in 
regions  which  are  primarily  industrial.  It  is  for  this  reason  that,  as 
soon  as  the  population  of  a  country  increases  to  such  an  extent  that 
it  becomes  impossible  to  produce  at  home  the  essential  foodstuffs 
save  at  exorbitant  expense,  the  country  in  question  turns  in  increas- 
ing measure  to  industry.  In  this  way  it  becomes  possible  to  offset 
the  increasingly  unfavorable  character  of  the  natural  means  of 
domestic  production,  through  the  importation  of  the  products  yielded 


396  BRENTANO 

by  more  abundant  natural  re?ources.  The  effects  of  the  limited  pro- 
ductivity of  its  own  soil  are  neutralized  by  virtue  of  the  means, 
afforded  by  the  unlimited  productivity  of  the  augmentable  capital 
devoted  to  manufactures,  of  obtaining  in  exchange  the  produce  of  the 

richest  soil  of  foreign  countries. 

*********** 

The  population  of  the  German  Empire  amounted  in  1816  to  24,- 
800,000  and  in  1900  to  56,300,000.  The  land-area  available  for  the 
production  of  the  foodstuffs  required  by  a  population  more  than 
twice  its  former  size  has,  however,  remained  practically  constant; 
the  price  of  land  has  increased,  during  the  century  in  question,  at 
least  three-fold,  and  in  some  instances  ten-fold ;  and  the  yield  per 
hectare  has  only  slightly  increased.  The  result  has  been  that  as  early 
as  1852  the  importation  of  rye— the  chief  agricultural  product 
consumed  by  the  population — exceeded  in  volume  the  exportation 
of  this  commodity ;  while  as  early  as  the  beginning  of  the  seventies 
of  the  nineteenth  century  wheat,  barley,  and  oats  began  to  be  im- 
ported in  greater  quantities  than  they  were  exported.  In  the  case 
of  all  the  chief  varieties  of  grain — to  say  nothing  of  crops  of  lesser 
importance — the  excess  of  importation  over  exportation  dates  from 
a  period  before  the  great  international  grain  trade  arose.  Even  at 
that  time,  when  the  prices  of  grain  had  reached  their  maximum  and 
when  the  population  was  twenty-five  per  cent  smaller,  German 
agriculture  was  unable  to  supply  the  domestic  demand  at  prices 
within  the  reach  of  the  population.  In  order  that  the  necessary 
foodstuffs  might  be  obtained,  Germany  exported  industrial  products, 
receiving  in  exchange  the  essential  supplies  of  food  on  such  favorable 
terms  as  to  admit  of  a  rapid  increase  in  its  population  (whose  figures 
we  have  given  above)  and  of  a  greater  augmentation  of  wealth  than 
in  any  previous  period  of  equal  length. 

One  would  suppose  that  every  patriot  would  find  in  such  a  devel- 
opment cause  for  rejoicing.  But  it  is  precisely  this  expansion  which 
to  Oldenberg,  Wagner,  and  other  economists  is  an  occasion  for 
anxiety,  causing  them  to  forecast  the  darkest  future  for  their  country 
in  case  it  continues  to  follow  the  course  upon  which  it  has  thus  em- 
barked. It  is  precisely  because  of  this  development  that  they  de- 
mand an  agricultural  policy  calculated  to  restore  Germany  to  the 
status  of  a  predominantly  agrarian  country. 


TERRORS  OF  THE  INDUSTRIAL  STATE  397 

III 

What  is  the  source  of  the  danger  which  threatens  us  in  case  of 
further  industrial  development? 

This  movement  may,  to  be  sure,  be  accompanied  by  certain  seri- 
ous subsidiary  phenomena. 

We  have  to  consider,  for  example,  the  unfavorable  effects  which 
modern  industrial  activity  may  exercise  upon  the  life  and  health  of 
the  workers.  And  these  effects  may,  to  be  sure,  assert  themselves. 
But  preventive  measures  may  be  taken  to  keep  them  in  check ;  and 
remedies  are  available,  to  neutralize  them  in  case  they  become 
apparent.  These  methods  are  represented  by  protective  labor  legisla- 
tion and  freedom  of  association.  In  case  these  two  measures  and 
their  administration  have  been  perfectly  developed,  the  position  of 
the  industrial  workers  is  more  favorable  than  that  of  the  rural 
population. 

Again,  the  concentration  of  great  bodies  of  workers  in  the  indus- 
trial centers  may  result  in  a  scarcity  of  housing  facilities,  with  all 
the  serious  consequences — economic,  hygienic,  and  moral — which 
such  a  situation  entails.  The  remedy  for  this  condition  is  to  be 
found  in  housing  reforms.  Such  measures  should  be  prosecuted  with 
all  possible  energy,  but  no  less  in  the  country  than  in  the  city. 

But  these  phenomena  are  by  no  means  the  chief  objection  which  is 
raised.  The  main  difficulty  is  to  be  found  in  the  state  of  dependence 
upon  foreign  countries  which  it  is  claimed  will  result  from  further 
industrial  development  on  our  part.  This,  it  is  alleged,  will  under- 
mine the  entire  foundation  of  German  political  economy.  For  it  is  a 
question  whether  foreign  countries  are  willing  and  able  to  furnish  us 
with  their  agricultural  products,  at  moderate  prices  satisfactory  to 
us,  and  to  take  our  own  products  in  exchange,  at  prices  which 
guarantee  us  a  profit. 

It  must  be  said  that  this  conception  of  the  state  of  dependence 
upon  foreign  nations,  in  which  Germany  in  consequence  of  the 
expansion  of  its  foreign  trade  may  be  placed,  is  to  be  classed  among 
the  most  irrational  of  those  illusions  which  prevail  to-day  in  certain 
circles.  As  a  matter  of  fact,  however,  it  would  be  a  question  of 
dependence  only  in  case  we  were  forced  to  rely  for  supplies  of  an 
indispensable  commodity  upon  a  single  country,  which  would  be  in 


398  BRENTANO 

a  position  to  refuse  to  furnish  us  with  this  commodity,  or  else  to 
provide  it  only  upon  conditions  which  we  should  find  intolerable. 
But  there  is  no  commodity  to  which  these  conditions  could  apply. 
In  all  other  cases  foreign  trade  makes  other  countries  no  less  de- 
pendent upon  us  than  we  are  dependent  upon  them.  Such  depend- 
ence is  reciprocal.  Foreign  countries  are  forced  to  rely  upon  us, 
for  the  purchase  and  sale  of  commodities,  in  a  measure  equal  to  our 
own  dependence  upon  them.  So  long  as  other  countries  have  any- 
thing which  they  desire  to  sell  to  us,  just  so  long  are  they  obliged 
to  purchase  our  own  products  in  return ;  and  the  more  we  concen- 
trate our  production  upon  those  fields  of  industry  in  which  we 
produce  the  greatest  surplus,  the  greater  the  profit  which  will  accrue 
to  us  from  this  international  exchange.  For  in  proportion  as  we  do 
this  we  obtain  the  imported  commodities  more  cheaply  than  we 
could  create  them  ourselves. 

But,  we  are  told,  consider  the  case  of  Russia !  Did  it  not,  a  few 
years  ago,  issue  a  prohibition  upon  the  exportation  of  rye?  This 
certainly  tends  to  show  that,  if  we  do  not  ourselves  produce  the 
grain  necessary  to  supply  the  domestic  demand,  we  cannot  always 
rely  upon  other  countries  which  shall  be  willing  to  provide  us  with 
the  requisite  supply.  But  this  case  with  respect  to  Russia  proves 
the  very  opposite  of  what  it  is  intended  to  demonstrate.  For,  pre- 
cisely because  Russia  was  primarily  an  agricultural  state,  it  had 
nothing,  when  it  was  confronted  with  a  failure  of  crops,  which  it 
could  export  in  exchange  for  the  necessary  supply  of  grain,  with  the 
result  that  it  faced  a  condition  of  terrible  famine ;  whereas  it  was 
very  easy  for  us  to  secure  elsewhere  the  rye  which  Russia  was  no 
longer  able  to  deliver,  in  exchange  for  our  industrial  products. 
Would  one  actually  wish  to  subject  us  again,  as  during  the  Middle 
Ages,  to  the  danger  of  experiencing,  in  connection  with  every 
failure  of  crops,  such  a  famine  as  that  which  during  the  last  few 
years  has  prevailed  in  Russia? 

A  further  objection  is  that  the  countries  from  which  we  now  im- 
port grain  in  exchange  for  our  manufactures  might  no  longer  be 
able  to  furnish  us  with  the  grain  required,  owing  to  the  fact  that  the 
growth  of  their  population  might  be  such  as  to  make  it  necessary  to 
reserve  their  supply  of  grain  for  domestic  consumption  —  in  which 
case  we  should  starve.    But  this  objection  is  in  direct  contradiction  to 


TERRORS  OF  THE  INDUSTRIAL  STATE  399 

the  claim  of  certain  others  of  our  opponents,  to  the  effect  that  very 
soon  such  fertile  foreign  countries  would  be  attracted  to  the  produc- 
tion of  wheat  that  the  price  of  central-European  grain  would  be 
depressed  to  59  marks  per  ton.  Now  it  is  clear  that  the  appearance 
of  one  of  these  dangers  upon  the  horizon  completely  excludes  the 
other.  Our  opponents  should,  accordingly,  agree  upon  one  or  the 
other  of  these  two  dangers.  As  a  matter  of  fact,  the  situation  is 
such  that,  in  the  countries  which  have  hitherto  supplied  us  with 
grain,  the  lack  of  adequate  labor  has  caused  a  large  portion  of 
the  soil  still  to  remain  uncultivated  and  a  further  portion  to  be 
very  inadequately  exploited ;  so  that  an  increase  in  the  population 
of  these  countries  may  be  expected  to  yield  progressively  larger 
surpluses  available  for  exportation.  Other  countries — in  fact,  whole 
continents — from  which  we  may  expect  imports  of  grain  have  only 
just  begun  to  be  subjected  to  cultivation.  According  to  Dr.  Karger's 
report,  Argentina  can  easily  produce  55,200,000  more  tons  of  wheat 
and  87,000,000  more  tons  of  corn;  Australia,  which  on  account  of 
its  dryness  was  formerly  represented  as  unsuited  to  the  cultivation 
of  grain,  furnished  us  in  1899  with  280,716  cwt.  (Centner)  of 
grain ;  the  amount  which  Africa  will  provide,  when  it  once  has  been 
subjected  to  cultivation,  might  well  be  enormous ;  and  agrarian 
circles  are  already  filled  with  anxiety  with  respect  to  the  conse- 
quences of  the  revival  of  agriculture  in  Mesopotamia. 

But  let  us  consider  the  chief  objection.  Would  the  countries  from 
which  we  import  grain  be  willing  permanently  to  accept  our  indus- 
trial products  in  exchange  for  their  grain?  North  America,  it  is 
argued,  is  no  longer  willing  to  do  so ;  a  similar  attitude  is  found  in 
Russia ;  and  even  Argentina  is  intent  on  developing  its  own  industries. 

Those  who  raise  this  objection  may  have  in  mind  two  different  sit- 
uations. They  may  mean  that  in  those  countries  which  have  hitherto 
offered  us  a  market  for  our  manufactures  industries  are  gradually 
developing  whereby  one  German  product  or  another  is  being  ren- 
dered superfluous  for  them.  It  is  unquestionably  true  that  this 
situation  will  actually  come  about.  But  this  signifies  for  our  politi- 
cal economy  merely  certain  displacements  in  the  field  of  manufac- 
turing. To  be  sure,  such  displacements  will  involve  individual 
producers  in  difficulties ;  but  this  disadvantage  is  offset  by  the  fact 
of  the  advantages  which  accrue  to  other  producers.    So  long  as  our 


400  BRENTANO 

industrial  organization  remains  sufficiently  mobile  and  flexible  for 
us  to  devote  our  productive  forces  in  still  greater  measure  to  those 
fields  of  manufacture  in  which  we  still  have  the  advantage  over  the 
countries  in  question,  our  economic  life  as  a  whole  will  not  be  im- 
paired by  the  necessity  for  such  readjustments.  So  long  as  they  are 
intent  on  selling  us  their  agricultural  products  they  will  be  com- 
pelled to  purchase  still  larger  quantities  of  the  products  of  these 
branches  of  industry,  in  proportion  as  their  purchase  of  other  com- 
modities of  German  manufacture  is  reduced  in  consequence  of 
domestic  production. 

On  the  other  hand,  those  who  raise  the  objection  in  question  may 
mean  that  the  countries  which  now  supply  us  with  agricultural  prod- 
ucts might  eventually  prove  superior  to  us  in  every  branch  of 
industry,  being  in  a  position  to  produce  every  sort  of  commodity 
more  cheaply  than  we,  and  of  a  quality  superior  to  our  own.  This 
situation  as  a  practical  case  is  hard  to  conceive  of,  although  the 
advantage  that  we  possess  in  so  many  respects  is  offset  by  one 
defect ;  viz.,  by  our  middle-class  policy,  which,  instead  of  creating  a 
new  middle  class  which  shall  correspond  to  our  modern  conditions  of 
production,  aims  at  the  artificial  preservation  of  the  old  middle  class 
which  corresponds  to  outworn  conditions  of  production,  and  which 
accordingly  increases  the  costs  of  production  in  all  fields  of  industry. 
It  is  especially  the  greater  cost  of  production  of  our  grain  that  in 
many  ways  offsets  our  competitive  advantage.  The  new  countries 
which  are  beginning  to  compete  with  us  in  the  industrial  field  are 
by  no  means  injured  by  our  middle-class  policy — so  detrimental  to 
our  position  in  the  field  of  international  competition — and  quote 
grain  prices  very  much  lower  than  our  own.  Let  us  assume  that 
those  countries  from  which  we  have  heretofore  obtained  agricultural 
supplies  should  prove  superior  to  us  in  every  branch  of  industry  as 
well.  Even  in  such  a  case,  as  Torrens  and  Ricardo  have  already 
shown,  they  would  not  cease  to  purchase  from  us  the  products  of 
our  manufactures.  It  would  be  to  their  interest  to  concentrate  their 
energies  on  the  production  of  those  commodities  in  respect  to  which 
they  showed  the  greatest  superiority ;  for,  even  if  they  were  in  a 
position  to  produce  still  other  commodities  more  cheaply  than  we, 
they  would  nevertheless  find  it  cheaper  to  obtain  these  products 
elsewhere   than    to    manufacture    them    themselves,    provided    they 


TERRORS  OF  THE  INDUSTRIAL  STATE  401 

were  to  purchase  them  from  us  in  exchange  for  the  commodities 
whose  manufacture  yielded  them  the  greatest  profit.  We  too  should 
still  derive  greater  profit  from  such  international  exchange  than  if  we 
were  to  resort  to  the  domestic  manufacture  of  those  products  hitherto 
obtained  from  abroad.  But  this  profit  would  be  smaller  than  that 
of  the  countries  whose  commodities  we  should  receive  in  exchange ; 
for  we  should  surrender  greater  cost-equivalents  than  we  received  in 
return.  Whoever  finds  occasion  for  anxiety  in  a  future  presenting  such 
a  prospect  should  perceive  therein  an  urgent  warning  to  oppose  the 
middle-class  policy  in  question,  and  especially  duties  on  grain,  since 
it  is  precisely  these  factors  which  increase  our  costs  to  such  an  extent 
that  we  are  in  danger,  in  our  international  exchanges,  of  sacrificing 
more  in  the  way  of  expenditures  of  labor  and  capital  than  we 
receive  in  return. 

But  there  is  no  occasion  for  anxiety  on  the  part  of  even  those  who 
find  this  line  of  reasoning  too  foreign  to  their  way  of  thinking  to 
admit  of  its  immediate  acceptance.  For  there  is  still  another  reason 
why  we  need  not  fear  the  collapse  of  our  economic  life  in  conse- 
quence of  inability  to  export  our  industrial  products.  In  the  first 
place  the  demand  for  the  products  of  industry  is  increasing  to 
such  an  extent  in  the  countries  which  are  already  civilized  that  it 
is  still  difficult  for  production  to  keep  pace  with  it ;  and,  furthermore, 
the  present  demand  on  the  part  of  civilized  countries  is  quite  insig- 
nificant in  comparison  with  the  demand  which  will  arise  in  future, 
when  those  countries  which  are  still  uncivilized  shall  have  reached 
an  equally  high  plane  of  development.  The  principal  industrial 
countries  which  employ  machinery  are  Great  Britain,  Germany, 
the  United  States,  France,  Belgium,  and  Holland.  In  comparison 
with  the  volume  of  exportation  from  these  states,  the  amount  of 
industrial  products  exported  by  other  countries  is  negligible.  The 
population  of  the  countries  which  we  have  named  amounts  to  less 
than  220,000,000,  while  that  of  the  whole  earth  is  estimated  at  one 
and  a  half  billions.  On  the  part  of  1,200,000,000  human  beings  the 
demand  for  commodities  is  only  in  an  incipient  stage.  Their  back- 
wardness in  respect  to  consumption,  and  the  extent  to  which  this  is 
susceptible  of  expansion,  may  be  most  accurately  gauged  by  their 
use  and  consumption  of  iron  as  compared  with  its  utilization  by 
countries  which  are  more  advanced.    For  the  chief  demand  for  iron 


402  BRENTANO 

is  in  connection  with  transportation.  The  consumption  of  small 
quantities  of  iron  points  to  an  inadequate  development  of  trade  and 
transportation,  and  vice  versa.  In  proportion  as  there  is  develop- 
ment in  the  transportation  facilities  which  require  the  use  of  iron, 
there  arises  a  demand  for  other  commodities,  leading  in  turn  to  the 
development  of  branches  of  production  whereby  this  demand  may  be 
satisfied.  If  we  take  the  consumption  of  iron  as  our  standard,  we 
find  that  it  amounts  to-day,  in  the  case  of  the  population  of  more 
than  1,200,000,000  cited  above,  to  only  11  or  12  pounds  per  capita; 
while  in  Great  Britain,  France,  and  Germany  it  amounted,  in  1889, 
to  175  pounds  and  in  the  United  States  to  300  pounds  per  capita. 
In  the  last-named  country  it  has  since  risen  to  350  and  will  soon  reach 
400  pounds ;  and  a  similar,  if  not  quite  so  great,  increase  is  apparent 
in  the  European  countries  in  question.  Every  steamer  that  calls  at 
the  ports  of  the  countries  represented  by  the  1,200,000,000  souls 
above  mentioned  and  every  rail  that  is  laid  in  their  territory  serves 
to  increase  their  needs.  With  the  increase  in  their  consumption  of 
iron  rails,  tools,  and  machines  their  capacity  for  production  and 
consumption  is  tremendously  heightened.  We  are  witnessing,  ac- 
cordingly, only  the  first  stages  of  the  development  of  the  greater  part 
of  the  earth  through  steamships  and  railroads ;  and  every  ton  of 
iron  that  is  used  in  connection  with  this  process  creates  a  growing 
demand  for  iron  for  some  other  purpose,  at  the  same  time  placing 
the  population  of  Asia,  Africa,  Central  and  South  America,  and 
Australia  in  a  better  position  to  satisfy  its  growing  needs.  This 
increase  in  the  purchasing-power  of  a  population  of  more  than 
1,200,000,000  will  inevitably  furnish  the  different  branches  of 
industry  in  those  countries  which  to-day  dominate  the  industrial 
field  with  such  a  demand  for  their  products  that  they  will  be  able 
to  support  a  much  larger  population  than  their  present  total  of 
scarcely  220,000,000. 

But  how  will  it  be  when  this  population  of  more  than  1,200,000,- 
000  commences  to  manufacture  on  its  own  account,  in  order  to 
satisfy  its  increasing  needs?  Shall  we  be  able  to  compete  with  it, 
in  view  of  the  cheap  labor  which  it  v/ill  be  able  to  command  ?  By 
all  means ;  for  as  long  as  it  is  true  that — in  accordance  with  the 
estimate  of  European  observers,  confirmed  by  Japanese  experts — the 


TERRORS  OF  THE  INDUSTRIAL  STATE  403 

work  of  one  European  is  equal  to  that  of  three  or  four  Japanese, 
we  need  not  be  alarmed  by  the  "yellow  peril";  that  is,  the  lower 
scale  of  wages  received  by  the  latter.  If,  now,  the  productive  capac- 
ity of  the  Japanese  is  heightened,  their  wages  rise  in  proportion, 
and  the  ratio  of  labor-costs  in  Germany  and  Japan  remains  constant. 
Whoever,  in  view  of  the  high  cost  of  labor  which  prevails  in  the 
countries  which  are  to-day  most  highly  developed  in  the  economic 
field,  feels  a  sense  of  anxiety  with  reference  to  their  future,  needs  but 
to  consider  the  case  of  the  United  States.  Wages  there  are  higher 
than  in  any  of  the  countries  of  Europe.  But  nowhere  is  the  cost  of 
labor,  required  for  the  production  of  a  commodity,  lower  than  in 
the  United  States.  If  the  scale  of  wages  determined  the  amount  of 
labor-costs,  not  a  single  commodity  could  be  exported  from  the 
United  States  to  any  of  the  ports  of  the  world ;  and  yet  all  the  other 
countries,  in  spite  of  their  far  lower  wage-scale,  fear  American 
competition. 

Indeed,  instead  of  being  injured  thereby,  the  population  of  less 
than  220,000,000  can  but  reap  benefit  from  an  increase  in  the  pro- 
ductive capacity  of  the  1,200,000,000  inhabitants  of  the  industrially 
undeveloped  sections  of  the  globe.  For  in  that  case  they  will  but 
receive  greater  quantities  of  commodities  from  these  foreign  countries 
in  exchange  for  their  own  products.  It  should  not  be  forgotten  that 
trade  consists  in  the  exchange  of  certain  commodities  for  other  com- 
modities, only  negligible  balances  being  paid  in  money.  If  we  set  no 
limit  to  our  purchases  and  consumption  of  what  each  section  of  the 
globe  has  to  offer,  shall  we  not  dispose  of  progressively  larger  quan- 
tities of  our  own  products  in  these  foreign  markets  ?  If  we  open  our 
own  markets  to  their  commodities,  shall  we  not,  at  the  same  time, 
inevitably  create  in  these  countries  a  market  for  our  products?  If 
we  develop  purchasing-power  and  the  capacity  for  consumption  on 
the  part  of  Asia,  Africa,  Central  and  South  America,  and  Australia 
by  admitting  their  products  to  our  markets,  shall  we  not  at  the  same 
time  increase  to  such  an  extent  their  demand  for  our  manufactures 
that  the  blast-furnaces,  factories,  and  workshops  of  the  population 
of  less  than  220,000,000  will  soon  no  longer  suffice  to  satisfy  them? 

But — reply  my  critics — such  a  view  leads  to  a  ruthless  policy, 
resulting  in  conflicts  between  nations  and  states,  in  the  interest  of 


404  BRENTANO 

securing  markets.  This  is,  of  course,  perfectly  possible ;  for  the 
countries  with  whom  we  shall  have  to  deal,  as  well  as  those  who  are 
destined  to  become  our  competitors,  by  no  means  hold  the  view  that 
the  interest  of  each  individual  nation  is  best  subserved  by  peaceful 
competition  in  the  newly  opened  markets  of  the  world ;  and  the 
nations  are  at  this  moment  once  more  in  such  a  state  of  mind  that 
they  are  led  to  stake  everything  on  the  use  of  force.  Such  conflicts 
are,  accordingly,  possible,  although  by  no  means  necessary.  But 
even  assuming  that  we  must  be  prepared  to  accept  such  struggles, 
as  an  inevitable  phenomenon  incidental  to  the  necessity  of  guaran- 
teeing the  existence  of  our  population,  those  who  to-day  champion 
the  cause  of  a  return  to  the  organization  of  the  predominantly  agri- 
cultural state  are  the  last  whom  I  should  have  expected  to  stress 
this  phenomenon  as  a  reason  why  the  German  nation  should  oppose 
a  policy  of  expansion.  For  a  hundred  years  the  Germans  have 
lamented  that  they  were  at  a  disadvantage  in  connection  with  the 
parceling-out  of  the  world  because  during  the  crucial  period  they 
had  not  been  politically  united.  There  is  no  one  who,  on  the  basis 
of  this  as  a  supplementary  reason,  would  have  welcomed  the  founda- 
tion of  the  German  Empire  more  enthusiastically  than  precisely  my 
present  opponents !  No  one  has  been  more  ardent  than  they  in 
advocating  a  powerful  navy  for  this  new  empire  in  order  that  it 
might  engage  in  world-politics  and  protect  its  economic  interests  in 
all  quarters  of  the  globe  and  on  every  sea !  How  often  have  we 
heard  from  their  lips  the  slogan:  "We  Germans  fear  God — and 
nothing  else  I  "  And  now  that  we  have  the  opportunity  to  give 
practical  proof  of  this  and  to  profit  by  the  political  power  for  which 
we  have  so  long  yearned,  are  we  voluntarily  to  abandon  to  other 
nations  that  from  which  we  have  so  long  lamented  that  we  have 
been  excluded  and  faint-heartedly  forego  even  the  increase  of  our 
population — simply  because  such  an  expansion  might  bring  us 
closer  and  closer  to  the  status  of  a  predominantly  industrial  state, 
involve  us  in  world-economics,  and  thus  impel  us  toward  conflicts 
with  which  they  associate  the  gravest  and  most  tragic  ethical, 
human,  and  social  consequences !  And  this  argument  is  advanced  by 
those  who,  merely  to  preserve  for  the  land-owning  classes  the 
social  and  political  position  which  they  have  hitherto  held  in  the 
state,  do  not  shrink  from  the  gravest  and  most  tragic  ethical,  human, 


TERRORS  OF  THE  INDUSTRIAL  STATE  405 

and  social  consequences — viz.,  the  misery  and  degradation  of  the 
domestic   laboring  population ! 

And,  finally,  we  are  confronted  with  the  fear  of  starvation  in  case 
of  war  unless  we  should  raise  on  German  soil  all  the  grain  required 
to  supply  our  needs.  This  is  perhaps  the  weakest  of  all  the  argu- 
ments advanced  in  favor  of  the  primarily  agrarian  state.  For  it 
would  be  precisely  Germany's  status  as  such  that,  in  view  of  the 
current  military  situation,  would  subject  it  in  case  of  war  to  the 
danger  of  starvation.  I  am  assuming  a  war  that  should  last  at  least 
a  year ;  although  I  must  admit  that  I  do  not  believe  that  it  is  any 
longer  possible  for  a  war  waged  on  a  large  scale  on  European  soil  to 
last  as  long  as  a  whole  year,  as  no  nation  is  any  longer  able  to 
meet  the  costs  of  such  a  war.  But  it  is  proper  to  consider,  in  connec- 
tion with  this  argument,  only  a  war  of  at  least  one  year's  duration ; 
for  if,  in  case  of  a  war  of  shorter  duration,  we  did  not  have  a  suffi- 
cient supply  of  grain  on  hand  to  last  us  until  the  end  of  the  conflict, 
our  statesmen,  leading  diplomats,  and  military  leaders  would  all 
deserved  to  be  hanged.  Let  us  assume,  accordingly,  that  it  is  a  ques- 
tion of  a  war  of  at  least  one  year's  duration  and  that  Germany  would 
be  obliged  to  depend  exclusively  upon  its  domestic  production  of 
grain  to  meet  its  demand  for  this  commodity.  Where,  in  such  a  case, 
should  we  secure  the  necessary  laborers  for  cultivating  the  fields 
and  harvesting  the  crops?  A  war  of  a  year's  duration,  in  which — 
in  accordance  with  our  presuppositions — we  should  be  surrounded 
with  enemies,  would  certainly  cause  every  man  who,  under  our 
present  laws,  is  in  any  way  subject  to  service,  to  be  drafted  into 
the  army, —  that  is,  a  total  of  10,200,000.  How,  then,  should  we  be 
able  to  cultivate  our  fields,  so  as  to  produce  the  total  supply  of  grain 
required  ?  Only  weaklings,  women,  and  old  men  would  be  available. 
These,  to  be  sure,  represent  the  resources  upon  which,  according  to 
Tacitus,  the  old  Germanic  peoples  depended  for  the  cultivation  of 
their  fields.  Such  a  situation  would,  however,  for  the  56,300,000 
inhabitants  of  the  present  German  Empire,  mean  practically  starva- 
tion. And  it  is  precisely  the  necessity  of  assuring  the  supply  of  the 
requisite  amount  of  grain  in  time  of  war  which  furnishes  the  motive 
for  the  expansion  of  our  navy. 

But  let  us  consider  the  assumption  that  the  German  Empire  is 
prepared  to  face  the  struggles  which,  it  is  said,   threaten  us  in 


4o6  BRENTANO 

connection  with  the  further  pursuit  of  the  policy  of  industrial  de- 
velopment and  with  the  effort  to  obtain  world-markets.  What,  then, 
is  the  state  of  national  defense  ? 

The  ability  of  a  country  to  defend  itself  depends  on  two  factors : 
first,  the  availability  of  the  requisite  number  of  efficient  troops ; 
second,  the  command  of  proper  resources  for  their  equipment  and 
support.  The  number  of  effectives,  moreover,  rests  on  two  condi- 
tions :  the  size  of  the  population  which  the  German  Empire  is  in  a 
position  to  feed,  and  the  number  of  men  available  for  military  serv- 
ice which  this  population  offers.  These  two  coefficients — not  simply 
one  or  the  other  of  them — determine  the  number  of  available  troops 
which  the  German  Empire  is  able  to  place  in  the  field.  It  is  not 
possible  to  determine  the  question  as  to  the  influence  of  the  voca- 
tional factor  upon  the  ratio  which  the  number  of  available  troops 
bears  to  the  total  population,  owing  to  the  deficiencies  of  the  material 
upon  which  such  an  investigation  is  based.  Nor  have  we  come  any 
nearer  to  a  decision  of  this  question  in  consequence  of  the  latest 
treatise  of  Bindewald,  published  in  Schmollers  Jahrbuch,  as  the 
field  which  he  has  investigated  is  wholly  inadequate,  possessing  as 
little  typical  significance  in  this  connection  as  does  the  Old  Bavarian 
field  (which  has  led  to  precisely  the  opposite  conclusions).  Some 
noteworthy  material,  however,  is  to  be  found  in  the  investigations 
of  the  Commissioner  of  Sanitation,  Dr.  Elben,  published  in  the 
Wiirttembergische  Jahrbiicher  for  1900,  Vol.  II,  No.  i,  pp.  97  ff., 
relative  to  military  efficiency  in  Wiirttemberg,  which  lead  to  the  con- 
clusion that  "  the  frequent  assumption  that  the  agricultural  districts 
furnish  proportionately  more  efficient  recruits  than  the  predomi- 
nantly industrial  sections  is  erroneous,"  and  that  "the  predominantly 
agrarian  or  industrial  character  of  the  population  does  not  appear  to 
have  any  characteristic  effect  upon  the  military  efficiency  of  the 
several  districts."  This  conclusion  would  tend  to  correct  my  own 
expressed  opinion^  to  the  effect  that  I  was  inclined  to  favor  agri- 
culture from  the  standpoint  of  military  efficiency.  But  even  if  this 
opinion  of  mine  were  to  find  new  confirmation  in  the  statistical 
inquiry  finally  promised  by  the  Prussian  Ministry  of  War,  the  ques- 
tion as  to  whether  a  country  is  able  to  place  in  the  field  more  recruits 

'  Cf.  Brentano  and  Kuczynski,  Die  heutige  Grundlage  der  deutschen  Wehr- 
kraft.    Stuttgart,  1900,  p.  32. 


TERRORS  OF  THE  INDUSTRIAL  STATE  407 

under  a  predominantly  agricultural  or  a  predominantly  industrial 
system  would  have  to  be  decided  in  favor  of  the  latter.  For  it  is 
clear  that,  the  larger  the  population  which  a  country  is  able  to  sup- 
port, the  greater  is  the  efficiency  of  the  state  from  the  standpoint  of 
national  defense  as  soon  as  the  point  has  been  reached  where  the 
growth  of  the  population  is  such  that,  even  though  the  relative 
efficiency  is  lower,  the  absolute  number  of  available  conscripts  is 
greater.  For  it  is  not  the  relative  number  of  soldiers  (proportion- 
ately to  the  size  of  the  population)  but  their  absolute  number  which 
constitutes  the  decisive  factor  in  time  of  war.  And  it  is  evident 
that  the  industrial  districts  of  a  country  furnish  more  recruits  than 
the  agricultural  regions,  as  industrial  districts  are  capable  of  sup- 
porting a  larger  population  and  are  hence  usually  more  densely 
populated  than  agricultural  sections ;  for  which  reason  the  former 
can  place  in  the  field  a  larger  army  than  can  the  latter. 

Now,  how  would  the  desired  return  to  the  organization  of  the  pre- 
dominantly agrarian  state  react  upon  imperial  finance  and  hence 
upon  our  ability  to  support  our  army  and  navy  in  time  of  peace 
and  in  war? 

Will  it  be  contended  that  German  agriculture,  once  it  has  been 
restored  by  means  of  high  tariffs  to  a  state  of  "  efficient  production," 
will  be  in  a  position  once  more  to  assume  the  chief  burden  of 
taxation?  Let  us  take  it  for  granted  that  those  who  claim  to  be 
unable  to  subsist  without  gratuitous  contributions  from  the  income 
of  others  would,  as  a  matter  of  fact,  be  prepared  to  impose  on 
agriculture — when  once  this  should  have  recovered  its  position  as 
the  dominant  occupation  —  the  correlative  duty  of  assuming  the  chief 
burden  of  taxation.  This  is,  to  be  sure,  a  somewhat  hasty  and  irre- 
sponsible assumption.  But  even  if  it  were  actually  fulfilled,  the 
merest  tyro  is  aware  of  the  difference  between  the  tSLX-payer  and  the 
one  who  bears  the  burden  of  taxation.  Similarly,  everyone  who  gives 
the  matter  any  thought  is  aware  that,  so  long  as  the  tax-paying 
power  of  the  agriculturists  rests  merely  upon  the  tariffs,  whereby  an 
artificial  stimulation  of  grain  prices  is  secured,  it  is  those  who  pay 
the  increased  grain  prices  who  in  reality  bear  the  burden  of  the 
taxes  levied  upon  the  agriculturists.  It  is  precisely  this  fact  which 
constitutes  the  most  serious  aspect  of  the  question  of  grain  tariffs, 
from  the  standpoint  of  political  economy. 


408  BRENTANO 

Let  us  undertake  to  make  somewhat  clearer  the  financial  conse- 
quences of  the  reorganization  in  question. 

It  is  claimed  that  agriculture,  in  default  of  gratuitous  contributions 
from  the  net  proceeds  of  the  other  branches  of  production,  is  itself 
no  longer  capable  of  showing  any  net  proceeds.  Just  as  "  sacrifices  are 
required  to  procure  everything  of  value  which  a  nation  needs — such 
as  national  defense,  internal  administration,  systems  of  justice  and  of 
education,  economic  supervision,  etc." — so  the  nation  must  be  willing 
to  make  sacrifices  in  order  once  more  to  secure  for  agriculture  these 
net  proceeds ;  and,  indeed,  it  is  expected  of  the  other  branches  of 
production  that  they  should  make  an  annual  contribution  of  hun- 
dreds of  millions  of  marks  to  the  support  of  agriculture,  by  means 
of  increased  prices  based  on  tariffs.  Now,  it  is  an  incontestable  fact 
that,  if  it  is  only  by  means  of  such  support  that  agriculture  can  be 
rendered  capable  of  bearing  its  share  of  taxation,  the  brunt  of  the 
hypothetical  taxation  to  which  it  is  subjected  is  not  borne  by  agri- 
culture but  by  the  branches  of  industry  which  are  required  to  make 
the  "sacrifice"  in  question — that  is,  to  make  the  gratuitous  contri- 
butions upon  which  are  based  the  net  proceeds  out  of  which  the 
taxes  are  paid.  But  how  shall  these  branches  of  production  maintain 
their  ability  to  pay  taxes,  in  case  (i)  they  are  still  subject  to  their 
former  tax-paying  obligation,  (2)  they  are  obliged  to  contribute  the 
amounts  required  for  the  "productive  capacity"  of  agriculture  and 
its  ability  to  meet  its  tax  assessments,  and  (3)  economic  policy  is — 
in  accordance  with  the  demands  in  question — so  adjusted  that 
foreign  trade  "is  restored  to  its  former  natural  basis"  and  that 
"division  of  labor  within  the  limits  of  the  nation  is  restored"  so 
as  to  enable  agriculture  and  the  agrarian  population  to  offer  to  the 
cities  and  to  the  industrial  workers  adequate  remuneration  and  a 
permanently  assured  market  for  their  products  and  services  in 
supplying  the  needs  of  the  domestic  rural  population?  This  whole 
situation  presents  internal  contradictions  against  which  the  very 
nature  of  things  rebels.  Agriculture,  in  this  way,  would,  to  be  sure, 
regain  its  position  as  the  leading  branch  of  production ;  not,  however, 
on  the  basis  of  its  own  inherent  progress,  whereby  it  should  prove 
superior  to  industry,  but  only  in  consequence  of  the  crippling  of 
industry  and  trade.  And  as  these  are  the  factors  upon  whose 
gratuitous  contributions  would  depend  the  artificial  prosperity  of 


TERRORS  OF  THE  INDUSTRIAL  STATE  409 

agriculture,  and  as  these  contributions  would  necessarily  cease  with 
the  decline  of  industry  and  trade,  the  crippling  of  the  latter  would  in- 
evitably entail  the  decline  of  this  artificial  prosperity  of  agriculture 
itself.  The  financial  effects  of  the  readjustment  would,  moreover, 
immediately  make  themselves  felt.  With  such  an  agricultural  policy, 
it  would  no  longer  be  possible  to  secure  the  necessary  appropriations 
for  even  our  peace-time  military  budget,  as  the  annual  income  of 
the  German  people  would  no  longer  be  adequate  to  the  task.  And 
what  would  be  the  situation  in  time  of  war?  If  trade  and  industry 
were  crippled  and  the  exchanges  demoralized,  where  could  the  neces- 
sary amounts  be  secured,  in  case  not  only  the  German  Empire  but 
also  its  allies  should  be  obliged  to  negotiate  a  loan  in  the  German 
money-market  ? 

It  is  recognized  that,  if  German  agriculture  is  to  be  supported  by 
a  yearly  contribution  of  hundreds  of  millions  of  marks  in  order  to 
maintain  its  "productive  efficiency,"  it  would  actually  be  to  the 
financial — and  hence  the  military — interest  of  the  Empire  to  furnish 
this  support  in  the  form  of  a  direct  subsidy  rather  than  to  resort  to 
an  increase  in  the  price  of  grain  by  means  of  tariffs.  While  trade  and 
industry  would,  of  course,  in  this  case  be  obliged  to  contribute, 
annually,  the  sum  of  many  million  marks  in  question,  this  would 
nevertheless  represent  far  less  of  a  drain  upon  them  than  would  a 
system  of  grain  duties ;  for  this  contribution  would  not  impair  their 
market  to  such  an  extent  as  would  the  latter  method,  not  only  as 
regards  foreign  trade  but  especially  as  regards  the  sale  of  products, 
on  a  large  scale,  to  the  domestic  industrial  workers,  since  it  is 
evident  that  the  sale  of  industrial  products  must  inevitably  decline 
in  proportion  as  duties  increase  the  price  of  grain  and  diminish 
the  demand  for  industrial  labor — that  is,  undermine  the  purchasing- 
power  of  the  workers.  But  this  direct  support  of  agriculture  would 
certainly  cause  the  agrarian  protective  policy  to  appear  to  even 
the  dullest  in  the  light  of  a  poor-relief  measure  ;  and,  above  all  things, 
Germany  would  never,  under  such  a  system,  be  restored  to  the 
organization  of  a  "  predominantly  agrarian  state."  And  as  my  oppo- 
nents, in  the  contemplation  of  their  policy  of  reaction,  have  lost 
sight  of  considerations  of  financial  and  political  economy,  their 
attention  is  at  present  concentrated  more  upon  this  return  to  the 
organization  of  the  past  than  upon  any  other  factors. 


410 


BRENTANO 


We  see,  accordingly,  that  the  desired  reversal  to  the  type  of  a  pre- 
dominantly agrarian  state  would  not  lead  to  a  prosperous  develop- 
ment of  agriculture  but  solely  to  the  crippling  of  trade  and  industry. 
It  is  a  destructive  policy  of  hatred  and  envy,  indulged  in  even  at  the 
expense  of  the  military  security  of  the  Empire,  that  is  desired. 

IV 

Is  it  necessary  to  present  any  further  arguments?  Is  there 
any  further  need,  after  the  considerations  which  have  already 
been  adduced,  to  challenge  the  desire  for  an  artificial  return  to 
the  organization  of  a  predominantly  agrarian  state  ?  The  basis  of  the 
position  of  my  opponents  as  well  as  of  my  own  is  the  fact  of  the 
great  size  and  annual  increase  of  the  population.  Under  a  primarily 
agricultural  system  the  population  would  either  not  be  susceptible 
of  any  further  increase,  or  at  least  could  not  increase  at  the  rate 
which  has  hitherto  prevailed ;  for,  if  it  increases  at  approximately 
one  per  cent  a  year,  the  law  of  decreasing  returns  from  the  cultiva- 
tion of  the  soil  would  preclude  the  production  at  reasonable  expense, 
on  German  soil,  of  the  necessary  means  for  the  support  of  our  popu- 
lation on  a  plane  of  civilization.  Even  more  marked  would  be  the 
inability  of  the  state,  under  this  form  of  economic  organization,  to 
make  the  appropriations  necessary  for  the  maintenance  and  strength- 
ening of  the  political  power  required  to  meet  the  exigencies  of 
the  nation's  future.  On  the  other  hand,  our  opponents  themselves 
admit  that  Germany  will  be  in  a  position  to  meet  all  these  demands 
if  organized  on  a  primarily  industrial  basis.  Their  anxiety  lest  the 
German  people  may  find  itself,  before  long,  unable  to  exchange  its 
industrial  products  for  the  agricultural  commodities  of  foreign  coun- 
tries has  proved  unfounded.  The  entire  controversy  would  thus 
appear  definitely  settled. 

But  it  remains  for  us  to  consider  the  means  by  which  our  oppo- 
nents propose  to  effect  the  artificial  reversal  to  the  type  of  a  pre- 
dominantly agrarian  state.  Nothing  is  better  suited  clearly  to  reveal 
the  "unsocial"  character  of  the  policy  which  they  champion  than 
are  its  effects  upon  the  increase  of  the  population,  such  as  they 
expect.  For  the  better  appreciation  of  this  factor,  let  us  return  to 
a  consideration  of  the  chief  argument  which  is  adduced   for  the 


TERRORS  OF  THE  INDUSTRIAL  STATE  411 

purpose  of  demonstrating  the  necessity  of  this  reorganization — 
viz.,  their  fear  of  the  impending  industrialization  of  the  whole  earth  ! 

Perhaps  the  greatest  scientific  achievement  of  the  past  century 
was  the  discovery  of  the  law  of  the  conservation  of  energy.  Accord- 
ing to  this  law,  the  sum-total  of  energy  in  the  entire  universe  remains 
absolutely  constant ;  and  every  process  in  connection  with  which 
energy  appears  to  be  consumed  is  based  merely  upon  the  transforma- 
tion of  kinetic  energy  into  energy  of  position,  or  of  energy  of  motion 
into  heat,  and  vice  versa.  Nevertheless,  as  physicists  proceed  to 
explain,  the  world  is  irresistibly  approaching  its  end.  While  it  is 
easy  to  convert  work  into  heat,  we  possess  no  method  whereby  we 
can  reconvert  all  of  this  heat  to  work.  It  follows  from  these  con- 
siderations that,  every  day,  more  and  more  of  the  mechanical  energy 
of  the  universe  is  being  transformed  into  heat  and  that,  if  this  con- 
version of  energy  into  heat  is  continued,  the  universe  will  eventually 
become  a  uniformly  heated  mass,  'absolutely  useless  for  the  further 
performance  of  work  (as  this  presupposes  changes  of  temperature) 
and  hence  wholly  unsuited  to  support  organic  life. 

A  sad  prospect  this,  which  the  natural  scientists  unfold  to  the 
vision  of  mankind !  But  nevertheless  we  eat  and  bathe  and  wash 
our  clothes  and  other  utilitarian  articles,  although  in  so  doing 
obvious  motive  power  is  transformed  into  heat,  which  is  then  dissi- 
pated. We  nevertheless  go  walking,  although  it  is  impossible  to 
reconvert  the  heat,  so  generated,  into  work.  We  nevertheless  con- 
tinue to  operate  machines,  in  spite  of  the  fact  that  not  only  every 
motion  but  even  every  cessation  of  the  movement  of  a  machine 
generates  heat,  which  cannot  be  transformed  again  into  work.  And 
yet  every  movement — since  it  is  converted  into  heat,  which  is  only 
partly  reconverted  into  energy,  the  rest  being  dissipated — brings 
us  nearer  to  the  end  of  the  world !  At  the  same  time,  I  have  never 
met  a  single  scientist  who,  in  order  to  delay  the  future  destruction 
of  the  world,  would  recommend  stagnation — that  is,  the  death  — 
of  present  activity. 

But  this  is  precisely  what  scientists  would  have  to  do,  if  they 
were  to  proceed  in  harmony  with  the  program  of  my  opponents.  For 
the  latter  recommend  that  the  German  people  commit  suicide,  in 
order  that  it  may  not  run  the  risk  of  being  killed !  What  is  it  that 
they  seek  to  teach  us?    The  predominantly  industrial  state,  they 


412  BRENTANO 

admit,  is  in  a  position  to  support  the  German  people,  even  if  it 
should  continue  to  increase  at  the  rate  which  has  hitherto  prevailed. 
But  for  how  long?  The  other  nations  of  the  earth  will  gradually 
come  to  produce  themselves  the  industrial  commodities  required  to 
meet  their  needs.  They  will  then  cease  to  exchange  their  agricul- 
tural products  for  our  manufactures.  Meanwhile  the  German  popu- 
lation will  have  increased  to  the  point  where  its  own  soil  will  no 
longer  be  able  to  produce  the  required  amount  of  food.  The  people 
of  Germany  will  then  perish  in  misery.  The  alternative  is,  to  re- 
turn to  the  model  of  the  primarily  agrarian  state.  This  economic 
organization  will  meet  our  increasing  food  requirements  only  on 
increasingly  rigorous  terms.  The  result  is  that  the  position  of  the 
population  is  now  less  favorable — so  much  so  that  "Malthus  is 
right,"  and  the  rate  of  increase  of  the  population  is  retarded.  In 
other  words,  let  us  bring  upon  our  people  at  once  the  misery  which 
we  fear  will  overtake  them  in  the  future. 

To  be  sure,  not  all  of  our  opponents  have  always  regarded  the 
rapid  increase  of  our  population  with  such  anxiety.  It  was  only  on 
the  27  th  of  January,  1900,  that  Adolph  Wagner,  in  his  address 
delivered  in  the  auditorium  of  the  University  of  Berlin,  on  the  sub- 
ject ''Transition  from  the  status  of  a  territorial  state  to  that  of  a 
world  power,"  spoke  in  a  tone  of  joyous  exultation  of  Germany's 
astonishing  increase  in  population,  as  a  token  of  the  progress  which 
Germany,  under  the  leadership  of  Prussia,  had  made  during  the 
nineteenth  century.  In  this  address  there  is  no  mention  of  the 
necessity  of  returning  to  the  status  of  a  predominantly  agricultural 
state :  on  the  contrary,  quite  the  opposite  is  suggested.  Even  though 
there  is  a  reference  to  the  restrictions  necessarily  placed  on  the  de- 
velopment of  the  manufacturing  state,  this  statement  is  immediately 
followed  by  the  assurance:  "As  regards  the  present  and  the  visible 
future,  the  thing  required  to  continue,  temporarily,  our  increase  in 
population  is  the  continued  development  of  our  economic  system 
along  the  same  line,  making  allowance  for  the  necessary  restrictions 
required  in  the  genuine  interest  of  the  nation  by  the  exigencies  of 
our  domestic  agriculture.  Due  account  must  be  taken  of  the  latter 
requirement,  in  determining  our  economic  and  commercial  policy, 
and  obviously  we  must  continue  to  develop  our  power  on  sea  and 
land."    Although  there  is  a  certain  element  of  obscurity  in  this 


TERRORS  OF  THE  INDUSTRIAL  STATE  413 

passage,  which  may  possibly  serve  to  nullify  the  import  of  the  rest 
of  the  statement,  it  is  nevertheless  true  that  there  is  not  the  slightest 
suggestion  of  anxiety  as  regards  the  consequences  of  further  devel- 
opment as  a  manufacturing  state  and  of  a  rapid  increase  of  the  popu- 
lation. The  watchword  is,  rather,  continued  progress  in  the  same 
direction,  the  more  academic  part  of  the  address  closing  with  the 
admonition  :  "Away  with  pessimism  and  timidity  !  "  While  Wagner 
at  an  earlier  date  had,  to  be  sure,  favored  a  treatment  of  the 
subject  similar  to  the  pessimistic  conclusions  which  in  this  address 
he  opposes, — viz.,  when  presented  by  Oldenberg,  at  the  Evangelical- 
Socialist  Conference, —  this  position,  as  reflected  by  his  own  inde- 
pendent declarations,  dates  only  from  September,  1900  (cf.  Lotse). 
Since  this  time  the  further  development  of  the  reservation,  just 
touched  upon,  relative  to  agriculture  has  resulted  in  his  championing 
a  reversal  in  the  economic  organization  of  the  German  Empire  to 
the  status  of  a  predominantly  agrarian  state,  and  has  led  him  to 
oppose  a  rapid  increase  in  the  population. 

One  thing  must  be  admitted :  if  one  regards  the  transition  from 
a  predominantly  agricultural  to  a  predominantly  industrial  type  of 
state  as  disastrous  to  the  welfare  of  Germany,  the  increase  in  popu- 
lation which  has  necessarily  brought  about  this  transition  must  be 
looked  upon  as  the  root  of  all  evil.  This  being  granted,  consistency 
requires  that  this  increase  should  be  opposed  and  that  measures 
should  be  demanded  which  shall  either  check  this  expansion  or  at 
least  retard  its  rate. 

But  how  is  it  proposed  to  effect  this  diminution  in  the  increase  of 
the  population,  by  bringing  about  a  deterioration  in  the  position 
of  the  people  ?  It  may  be  accomplished  in  two  ways :  by  diminish- 
ing the  birth-rate  and  by  increasing  the  death-rate.  With  reference  to 
the  birth-rate — that  is,  the  number  of  births  for  every  one  thousand 
inhabitants — Adolph  Wagner  asserts  that  the  ratio  among  the 
different  nations  of  the  world  remains,  on  the  whole,  constant.  It 
thus  becomes  evident  that  those  who  desire  to  retard  the  increase 
in  the  population  have  no  alternative  but  to  increase  the  death- 
rate.  And,  in  fact,  they  do  not  regard  its  diminution  as  an  unalloyed 
blessing,  as  it  rests,  in  their  opinion,  mainly  upon  the  decrease 
of  infant  mortality  and  the  reduction  of  the  death-rate  among  the 
aged.     This,  they  hold,  places  a  heavier  burden  upon  the  adult 


414  BRENTANO 

population,  subjecting  to  greater  pressure  the  productive  and  acquisi- 
tive elements. 

In  this  connection  I  would  call  attention — albeit  with  some  hesi- 
tation— to  the  fact  that  a  reduction  of  infant  mortality  means  a 
tremendous  saving  in  the  way  of  economic  sacrifices  and  an  enor- 
mous diminution  in  the  useless  expenditure  of  power,  labor,  and 
capital ;  for,  in  dealing  with  this  question,  economic  considerations 
play  so  insignificant  a  role  in  comparison  with  ethical  factors  as  to 
be  scarcely  worthy  of  mention.  But  if  one  chooses  to  view  the 
question  from  the  economic  standpoint,  it  must  be  said  that  it  is 
in  fact  only  the  prolongation  of  the  life  of  the  aged  that  places  an 
appreciably  greater  burden  upon  the  productive  members  of  society. 
How  proud  we  have  been  that  by  virtue  of  economic  and  hygienic 
progress  we  have  been  able  to  lengthen  the  span  of  life  of  the 
German  people!  While  the  birth-rate  fell  from  42.61  per  thousand, 
in  1876,  to  37.11  per  thousand,  in  1899,  the  death-rate  declined, 
during  this  period,  far  more  perceptibly :  it  was  reduced  from  30.62 
in  1872  to  21.78  in  1898  and  22.68  in  1899.  The  colossal  increase 
in  our  population  during  the  last  few  decades  is  thus  due  exclusively 
to  a  lower  percentage  of  mortality.  Any  attempts  to  effect,  by  means 
of  increasing  the  price  of  the  necessaries  of  life,  a  diminution  in  the 
rate  of  increase  of  the  population  must,  accordingly,  aim  at  the  nulli- 
fication of  this  progress.  How  enthusiastic  the  laboring  classes  will 
be  at  the  prospect  of  higher  duties  on  grain  when  they  learn  that 
this  measure  is  to  be  used  to  bring  them  nearer  to  the  grave !  Truly, 
I  am  unable  to  comprehend  why  we  should  have  introduced,  during 
the  eighties,  a  system  of  old-age  and  invalid  insurance,  if  this  is  to 
be  the  aim  and  object  of  our  endeavors.  On  the  other  hand,  I  now 
understand  the  idea,  which  has  arisen  among  the  advocates  of  levying 
duties  on  foodstuffs,  of  placing  the  revenue  which  accrues  there- 
from at  the  disposal  of  the  system  of  widows'  and  orphans'  insurance. 

At  the  same  time,  those  who  advocate  this  policy  assure  us  that 
they  are  by  no  means  indifferent  to  the  unspeakably  tragic  aspect 
of  the  method  by  which  they  seek  to  create  the  predominantly 
agricultural  state.  And  they  are,  in  fact,  such  excellent  and  emi- 
nently ethical  men  that  I  am  firmly  convinced  of  the  sincerity  of 
these  assurances  of  theirs.  But  the  very  fact  that  they  resign  them- 
selves to  the  inevitableness  of  the  method  by  which  they  propose  to 


TERRORS  OF  THE  INDUSTRIAL  STATE  415 

attain  their  purpose  shows  to  what  extent  their  minds  have  been 
beclouded  by  the  contemplation  of  their  aim,  which  has  made  it  pos- 
sible for  them  to  suppress  the  soundest  perceptions  and  sensibilities 
which  they  possess.  They  seek  to  justify  themselves  by  pointing  out 
that  it  is  not  a  question  of  the  size  of  the  population.  Never— so 
they  argue — could  we  hope  to  compete  with  Russia,  America,  or 
China  in  this  respect.  But  the  fate  of  China — which,  by  the  way, 
represents  the  purely  agrarian  type  of  state — shows  clearly  how 
vastly  superior  the  quality  of  a  population  is,  as  compared  with  mere 
quantity.  They  emphasize,  accordingly,  the  importance  of  quality 
versus  quantity,  and  hence  of  diminution  of  quantity  in  the  interest 
of  improving  the  quality.  The  type  of  people  distinguished  for  their 
superior  quality,  they  contend,  is  that  which  devotes  itself  to  agri- 
culture. The  method  whereby  this  quality  may  be  preserved  and 
enhanced  is,  they  admit,  rather  rigorous,  but  represents  the  only  avail- 
able remedy ;  and,  just  as  a  people  is  willing  to  make  sacrifices 
for  the  sake  of  securing  everything  worth  while — such  as  justice, 
governmental  administration,  national  defense,  etc. — so  it  must  be 
willing  to  make  some  sacrifice  in  the  interest  of  maintaining  this 
specially  superior  type  of  population,  even  though  the  price  paid  is 
want  and  misery  whereby  the  merely  quantitative  factor  is  eliminated. 

Germany's  future,  accordingly,  rests  on  the  production  of  agricul- 
tural supermen  by  means  of  increased  infant  mortality  and  the 
elimination  of  superfluous  old  people,  by  reducing  them  to  misery  in 
consequence  of  increasing  the  prices  of  foodstuffs ! 

According  to  the  latest  statistics  for  the  German  Empire,  this 
country  has,  next  to  Russia,  registered  the  greatest  increase  in 
population  of  any  country  in  Europe.  With  its  annual  birth-rate 
of  almost  two  millions,  its  population  is  augmented  every  year  to  the 
extent  of  approximately  800,000  souls — that  is,  the  rate  of  increase 
is  twice  that  of  Great  Britain  or  Italy,  three  times  that  of  Austria, 
and  four  times  that  of  Hungary;  while  in  all  the  other  countries 
the  excess  of  births  over  deaths  is  less  than  100,000  souls.  As  com- 
pared with  Russia,  Germany  has  the  advantage  that  the  increase  of 
its  population  is  attained  without  the  sacrifice  represented  by 
Russia's  high  rate  of  mortality,  and  proceeds  less  irregularly.  This 
has  hitherto  been  to  us  a  source  of  pride  ;  for  in  this  great  expansion, 
achieved  in  conjunction  with  a  decreasing  birth-  and  death-rate,  as 


41 6  BRENTANO 

in  the  great  augmentation  of  national  wealth  by  which  it  has  been 
accompanied/  we  have  perceived  an  assurance  of  sound  development 
and  an  economic  and  political  guaranty  for  the  future.  According 
to  those  who  interpret  the  transition  to  the  status  of  a  predominantly 
manufacturing  state  in  terms  of  a  national  calamity,  this  phenomenon 
has  been  an  illusion.  Our  future  appears  to  them  to  find  a  safer 
guaranty  in  a  less  rapid  increase  of  wealth  and  population;  and  it 
is  for  this  reason  that  they  advocate  a  return  to  the  organization  of 
the   predominantly  agrarian  state. 

1  According  to  the  income  statistics  given  above,  this  increase  in  wealth 
has  by  no  means  been  confined  to  the  cities.  In  the  cities  of  Prussia  the  as- 
sessed income  rose,  from  1892  to  1900,  42.1  per  cent,  while  in  the  country  dis- 
tricts the  increase,  while  not  so  marked  as  in  the  cities,  amounted  to  27.8  per 
cent;  similar  figures  are  available  for  Saxony. 


XVI 

MARSHALL :  THE  FISCAL  POLICY  OF  INTERNA- 
TIONAL TRADE^ 

Part  I.    The  Direct  Effects  of  Import  Duties 

A.    THE  PROBLEM  CAN  BE  PARTIALLY  SOLVED  BY 
A  SIMPLE  STUDY  OF  PRICE  MOVEMENTS 

THE  first  issue  to  which  my  attention  has  been  called  is  the 
incidence  of  import  duties.  It  is  my  opinion  that,  in  nearly  all 
important  cases,  they  are  borne  almost  exclusively  by  the  consumer. 
But  there  is  no  absolute  rule  in  the  matter.  Cases  can  be  conceived 
on  a  large  scale,  and  have  actually  existed  on  a  small  scale,  in  which 
a  perceptible  part  of  the  burden  of  an  import  duty  is  borne  by 
foreigners.  And,  of  course,  a  part  of  the  pressure  of  every  new  tax 
of  whatever  kind  is  apt  to  rest  temporarily  on  producers,  merchants, 
shippers,  and  others ;  until  they  are  able  to  shift  it  to  its  permanent 
resting-place  on  the  shoulders  of  consumers. 

2.  The  problem  cannot  be  completely  solved  by  a  mere  study  of 
price  movements.  That  indeed  seems  to  show  that  the  consumer 
must  necessarily  bear  the  whole  burden  of  every  such  tax,  together 
with  the  profits  on  it  of  each  stratum  of  traders  through  whose  hands 
it  passes.  But  the  prima  facie  case  thus  made  out  is  not  valid,  at 
all  events  in  relation  to  a  system  of  import  duties  in  contrast  to  a 
single  duty. 

The  prima  facie  case  is  this :  — As  a  general  rule  the  exporters 
are  indifferent  as  to  the  market  to  which  they  send  their  goods ; 
and  select  that  which  will  yield  them  the  best  price  after  paying  all 
the  costs.  If,  therefore,  the  cost  of  delivering  any  commodity  in  a 
certain  market  is  increased  by  the  levying  of  an  import  tax  of  1 1. 

1  Alfred  Marshall  (1842-  ),  Memorandum  on  the  Fiscal  Policy  of  Inter- 
national Trade  (1903).    (Pp.  3-8,  11-20,  22-29,  of  2d  (1908)   ed.) 

417 


41 8  MARSHALL 

upon  it ;  exporters  will  avoid  that  market  until,  by  making  the  com- 
modity scarce  in  that  market,  and  rather  more  abundant  than  before 
in  other  markets,  they  have  raised  its  price  (duty  paid)  in  that 
market  by  i  /.  relatively  to  its  price  in  other  markets  in  which 
there  has  been  no  new  tax.  The  ultimate  consumer  may,  therefore, 
be  expected  to  have  to  pay  this  i  /.,  together  with  profits  on  the  extra 
capital  required  for  moving  the  taxed  commodity  by  all  the  dealers 
through  whose  hands  it  passes  on  its  way  to  him.  And  price  statis- 
tics show  that  he  has  to  do  so,  if  he  has  no  alternative  source 
of  supply. 

3.  This  prima  facie  case  for  the  conclusion  that  the  whole  burden 
of  an  import  tax  is  always  borne  by  the  consumer  is  invalid,  because 
it  neglects  the  fact  that  the  purchasing  power  of  money  in  any 
country  may  be  affected  by  its  tariff  policy.  For  taxes  on  certain 
imports  into  a  country  raise  their  value  in  that  country  relatively 
to  things  which  are  not  taxed ;  and  one  of  these  is  gold.  Therefore 
the  purchasing  power  of  gold  is  generally  low  in  a  country  which 
levies  many  high  import  duties ;  and  when  we  know  that  a  certain 
fiscal  policy  has  raised  the  price  of  any  given  commodity  to  a  con- 
sumer by,  say,  a  quarter,  we  have  not  got  an  answer  to  the  question 
how  great  the  burden  on  him  really  is. 

4.  It  is,  however,  important  to  remember  that,  if  the  taxes  affect 
a  small  portion  only  of  the  country's  imports,  they  will  not  cause 
an  appreciable  substitution  of  gold  and  other  untaxed  imports  for 
taxed  imports ;  that  is,  they  will  not  appreciably  alter  the  general 
level  of  prices.  The  taxed  commodities  will  cost  more  money  to  the 
consumer  (near  the  frontier)  by  the  full  amount  of  the  tax;  and 
this  increase  of  price  will  indicate  a  nearly  corresponding  increase  of 
real  cost,  because  the  value  of  money  will  be  but  little  changed. 

5.  There  are,  moreover,  other  difficulties  besides  that  connected 
with  changes  in  the  purchasing  power  of  money,  which  resist  the  en- 
deavour to  decide  by  direct  observation  what  is  the  incidence  of 
import  duties. 

For  instance,  improvements  in  production  and  transport  are 
constantly  raising  money  incomes  relatively  to  prices ;  and  if  the 
influence  of  such  improvements  is  being  felt  in  the  same  decade  in 
which  a  tariff  is  raised,  the  rise  in  money  incomes  relatively  to  prices 
may  be  considerable ;  and  yet  it  may  be  much  less  than  it  would 


ON  FISCAL  POLICY  419 

have  been  if  the  tariff  had  not  been  raised.  No  doubt  the  influence 
of  this  disturbing  cause  can  be  partly  ehminated  by  comparing  the 
movements  of  incomes  relatively  to  prices  in  countries  in  the  same 
industrial  phase,  whose  tariffs  have  not  moved  in  the  same  direction. 
But,  not  to  mention  the  difficulties  of  obtaining  such  statistics,  they 
cannot  be  interpreted  without  taking  account  of  the  different  influ- 
ences which  are  being  exerted  in  different  countries  by  education,  by 
wise  and  thrifty  household  management,  and  by  the  development  of 
latent  natural  resources  through  the  spread  of  railways  and  otherwise. 

The  question  cannot  be  handled  effectively  except  by  a  study  of 
those  causes  of  causes  on  which  this  Memorandum  touches  but 
slightly.  All  that  can  be  done  here  is  to  indicate  that  a  country 
cannot  expect  to  throw  any  considerable  share  of  the  burden  of  her 
tariff  on  other  countries,  unless  she  is  in  a  position  to  dispense  with 
a  great  part  of  the  goods  which  she  imports  from  them ;  while  she 
is  at  the  same  time  in  the  possession  of  such  large  and  firmly  estab- 
lished partial  monopolies,  that  those  countries  can  not  easily  dispense 
with  any  considerable  part  of  their  imports  from  her.  So  far  as  the 
latter  condition  is  concerned,  England  was  in  a  strong  position  early 
in  last  century.  But  not  even  America  is  in  a  strong  position  now ; 
while  England  and  Germany  are,  as  it  seems  to  me,  in  weak  positions. 

A  thorough  answer  to  the  question  can  be  found  only  by  going 
back  to  the  great  truth  which  Committees  of  the  House  of  Commons 
at  the  beginning  of  last  century  investigated,  and  which  was  stated 
forcibly  by  Ricardo.  It  is  that  gold  is  a  mere  commodity  in  inter- 
national trade ;  and  that  the  levels  of  international  prices  do  not 
govern  the  course  of  international  trade,  but  are  governed  by  it. 
Reasoning  on  this  basis  is  troublesome ;  and  the  difficult  argument 
which  follows  under  head  (B)  is  not  essential  for  the  main  purpose 
of  this  Memorandum.   A  resume  of  it  is  given  in  §  55. 

B.    A  PARTIAL  THEORETICAL  SOLUTION  OF  THE  PROBLEM 
OF  THE  INCIDENCE  OF  IMPORT  DUTIES 

6.  Suppose  two  countries,  A  and  B,  to  trade  with  one  another, 
and  only  with  one  another ;  and  to  levy  no  taxes  on  imports.  The 
price  of  A's  goods  in  B  will  differ  from  their  prices  at  home  only 
by  costs  of  transport  (including  costs  of  handling),  and  vice  versa. 


420  MARSHALL 

But  now  A  puts  a  tax  of  50  per  cent,  on  all  imports,  except  of  course 
gold.  The  prices  of  A's  goods  will  still  be  higher  in  B  than  at  home 
merely  by  the  cost  of  carriage.  But  the  prices  of  B's  goods  to 
consumers  in  A  are  now  bound  to  rise  50  per  cent,  relatively  to  their 
level  in  B  :  for,  unless  and  until  that  happens,  it  will  answer  to 
send  gold  instead  of  goods  from  B  to  A.  This  rise  in  price  of  B's 
goods  in  A  relatively  to  their  price  in  B  takes  place  whatever  be  the 
urgencies  of  B's  demand  for  A's  goods,  and  of  A's  demand  for  B's 
goods.  But  it  is  mainly  on  the  urgencies  of  these  reciprocal  demands 
that  the  incidence  of  the  tax  depends ;  and  the  observed  price  move- 
ment, taken  by  itself,  proves  nothing  conclusively. 

7.  The  burden  of  these  taxes  will  be  thrown  mainly  on  B  in  the 
exceptional  case  in  which  B's  demand  for  A's  goods  is  very  urgent 
(and  inelastic)  while  A's  demand  for  B's  goods  is  not.  For  then  the 
tax  will  first  raise  the  price  of  B's  goods  in  A;  secondly,  diminish 
their  sales  there  a  little ;  thirdly,  lessen  the  supply  of  A's  goods  in 
B  a  little ;  and  since  B's  demand  is  inelastic,  the  small  check  to  their 
supply  will  cause  each  of  these  goods  to  be  disposed  of  for  a  much 
greater  quantity  of  the  labour  and  general  commodities  of  B  than 
before.  It  might  conceivably  exchange  for  just  double  as  much  as 
before  of  B's  goods  in  B,  or  in  bond  in  A ;  and  therefore  for  just  as 
much  as  before  duty  paid.  In  this  case,  the  whole  burden  of  the  tax 
would  be  thrown  upon  B. 

Here  the  solution  of  this  particular  case  ends,  so  far  as  essentials 
go.  But  its  secondary  consequences  in  terms  of  price  movements 
should  be  added.  Since  A's  goods  can  be  disposed  of  in  B's  markets 
on  such  favourable  terms,  gold  will  be  sent  from  B  to  buy  them. 
Therefore,  gold  will  become  very  plentiful  in  A ;  prices  generally 
will  rise  there,  and  a  rise  in  money  wages  will  follow  in  due  course. 
Therefore,  though  B's  goods  in  A  sell  for  twice  the  price  they  do  at 
home,  yet  their  prices  will  not  represent  much  more  effort  than 
before ;  they  may  not  represent  any  more  effort  at  all.  In  B,  on  the 
other  hand,  gold  will  have  become  relatively  scarce,  and  will  com- 
mand more  of  B's  goods  and  services  than  before.  Therefore,  al- 
though A's  goods  sell  in  B  for  only  their  price  at  home,  together  with 
cost  of  carriage,  yet  their  real  cost  to  B  will  be  very  much  increased. 
The  consumers  in  A  will  be  nearly  as  well  off  as  before,  and  their 
Government  will  have  got  the  taxes  mainly  at  the  expense  of  B. 


ON  FISCAL  POLICY  421 

8.  On  the  other  hand  A  will  have  to  bear  the  burden  of  her  own 
taxes  in  the  far  more  probable  case  in  which  B  is  in  no  urgent  need 
for  her  goods.  For  then,  when  the  merchants  slacken  their  deliv- 
eries of  A's  goods  in  B,  the  market  will  be  unresponsive.  Each  bale 
of  A's  goods  will  bring  back  about  as  much  of  B's  as  before.  A  day's 
labour  in  A,  or  a  bale  of  A's  goods,  will  command  about  as  much 
as  before  of  B's  goods  in  bond,  and  the  taxes  on  B's  goods  will  be 
paid  in  the  main  by  those  who  consume  them  in  A.  In  this  case 
there  will  not  probably  be  any  considerable  movement  of  gold,  and 
the  prima  facie  suggestions  of  price  statistics  will  correspond  pretty 
closely  to  the  actual  facts. 

This  assumes  that  A's  demand  for  B's  goods  is  elastic.  For  the 
sake  of  completeness,  however,  it  may  be  well  to  take  an  improbable 
case  corresponding  to  that  in  §  7  ;  but  with  the  parts  of  A  and  B 
inverted :  and  we  may  even  suppose  A's  Government  to  spend  a 
great  part  of  the  taxes  in  purchases  of  imported  goods.  Then  the 
private  consumers  in  A  being  in  urgent  need  of  their  old  supplies  of 
B's  goods,  they  may  have  to  force  the  trade,  and  to  accept  less  and 
less  of  foreign  goods  in  return  for  each  bale  of  their  own :  so  that  A 
may  ultimately  have  to  bear  even  more  than  the  whole  burden  of 
her  taxes. 

9.  The  two  countries  A  and  B,  being  taken  to  be  shut  off  from 
all  trade  except  with  one  another,  it  is  prima  facie  not  altogether 
unreasonable  to  suppose  that  B's  demands  for  A's  goods  are  some- 
what urgent ;  and  that,  therefore,  the  burden  of  the  taxes  will  fall 
in  a  considerable  measure  on  her.  But  in  the  real  world  B  always 
has  access  to  other  markets,  and  therefore  she  will  not  consent  to 
pay  any  of  A's  taxes  unless  A  has  something  like  a  monopoly  as 
regards  nearly  all  her  exports ;  or  else,  from  geographical  or  other 
causes,  B  is  very  much  at  A's  mercy.  It  is  only  under  very  rare 
conditions  that  a  country  is  practically  the  sole  market  for  even  a 
single  product  which  another  country  has  exceptional  advantages 
for  producing.  A  tax  on  such  a  product  might  indeed  rest  perma- 
nently on  the  producers ;  but  taxes  on  other  products  would  nearly 
always  be  borne  wholly  by  the  consumers  as  soon  as  the  producers 
could  make  arrangements  for  selling  in  other  markets,  either  their 
old  products,  or  others  to  which  they  could  gradually  divert  their 
energies  and  resources.    It  is   theoretically  possible   that,  even  in 


422  MARSHALL 

the  absence  of  such  a  monopoly,  A's  taxes  might  permanently 
lower  the  price  of  B's  goods  in  world  markets;  and  therefore  in 
bond  in  A's  ports.  But  in  fact  this  never  does  occur  on  a  consider- 
able scale  in  the  modern  world,  for  reasons  some  of  which  are  indi- 
cated later  on. 

C.  A  BROAD  TREATMENT  OF  SOME  REPRESENTATIVE 

CASES 

10.  The  effect  of  an  import  duty  is  felt  in  the  first  instance  at  the 
frontier.  If  the  commodity  is  bulky,  it  may  very  well  be  imported 
in  spite  of  a  heavy  duty,  and  yet  be  sold  in  other  parts  of  the  country 
at  a  low  price.  To  take  a  strong  instance,  timber  is  sometimes 
almost  without  value  on  the  Pacific  slope,  while  in  other  parts  of 
the  United  States  its  price  responds  to  taxes  on  importations  from 
Canada.  But  in  countries  no  part  of  which  is  far  removed  from  the 
frontier  suitable  for  importation,  such  as  the  United  Kingdom  and 
Belgium,  the  full  effect  of  an  import  duty  is  felt  by  nearly  all  con- 
sumers even  of  commodities  as  bulky  as  wheat. 

11.  Again,  it  is  not  denied  that  exceptional  geographical  causes 
may  put  a  country  very  much  at  the  mercy  of  a  stronger  country 
which  lies  between  it  and  the  main  movement  of  the  world.  Possibly 
Germany,  and  even  Austria-Hungary,  may  be  able  to  throw  a  small 
part  of  the  burden  of  their  import  duties  on  countries  lying  to  the 
east  of  them.  And  yet  Germany  cannot  throw  on  England  any  share 
of  the  burden  of  her  own  import  duties ;  even  though  there  are  a  few 
chemical  and  other  German  products,  which  England  cannot  easily 
forego.  England  can  always  take  these  as  her  first  choice,  and  for 
the  rest  of  her  trade  Germany  must  force  her  way  with  goods  which 
England  has  no  special  reason  for  obtaining  from  her  rather  than 
from  other  sources.  And  what  is  true  of  Germany  with  regard  to 
England  is  true  of  England  with  regard  to  the  whole  Western  world. 
There  may  be  some  small  markets  in  which  her  connections  by  steam- 
ship or  otherwise  give  her  an  advantage  tending  towards  a  mitigated 
monopoly.  But  in  the  aggregate  they  count  for  little.  There  is  thus 
no  considerable  exception  to  the  rule  that  England  has  now  to  pay 
the  burden  of  her  own  import  duties. 

12.  There  has,  indeed,  never  been  a  country,  the  whole  of  whose 
exports  were  in  such  urgent  demand  abroad,  that  she  could  compel 


ON  FISCAL  POLICY  423 

foreigners  to  pay  any  large  part  of  any  taxes  which  she  imposed  on 
her  imports.  But  England's  exports  approached  to  it  twice.  Once 
they  consisted  chiefly  of  wool,  which  was  indispensable  to  Flemish 
weavers.  And  again,  in  the  first  half  of  the  nineteenth  century,  they 
consisted  chiefly  of  manufactures  made  by  steam  machinery,  which 
was  not  in  general  use  anywhere  else ;  together  with  tropical  prod- 
ucts, which  she  had  special  facilities  for  obtaining.  It  is  possible 
that  the  rest  of  the  world  would  have  given  twice  as  much  of  their 
own  goods  as  it  did  give  for  many  of  them,  rather  than  go  wholly 
without  them.  As  it  was,  England  did  no  doubt  throw  a  consider- 
able part  of  the  burden  of  her  taxes  (import  and  export)  on  the 
foreign  consumer:  though  it  may  be  true  that  she  made  her  taxes 
(or  prohibitions  of  import)  heavy  just  where  they  ought  to  have  been 
lightest ;  that  she  thus  checked  that  growth  of  the  vitality  of  the 
masses  of  her  people,  which  ought  to  have  resulted  from  her  new 
command  over  the  forces  of  nature ;  and  hastened  the  day  in  which 
she  would  cease  to  hold  the  unchallenged  leadership  in  industry. 

13.  But  any  powers  which  she  may  have  had  of  throwing  a  con- 
siderable part  of  the  burden  of  her  import  duties  on  foreign  con- 
sumers of  her  products  has  been  destroyed  by  two  inevitable  causes. 
Her  arts  and  resources  of  production  have  become  the  common 
property  of  all  countries  of  the  Western  world,  and  in  some  impor- 
tant cases  have  been  developed  by  others  faster  than  by  herself; 
and  the  growth  of  her  population  has  made  her  demand  for  many 
of  her  imports  more  urgent  than  is  the  demand  of  any  other  country 
for  any  of  her  exports.  In  this  respect  she  is,  however,  not  in  a 
much  weaker  position  than  Holland  and  Belgium  and  Germany,  as 
will  be  argued  later. 

14.  I  assume  that  we  are  concerned  with  settled  trade  relations, 
and  not  with  exceptional  or  temporary  incidents.  Almost  every 
trader  has  opportunities  of  springing  hard  bargains  upon  particular 
customers,  who  have  made  their  plans  on  the  expectation  that  he 
would  deal  with  them  in  a  regular  manner.  Such  undignified  action 
brings  its  own  nemesis.  But  practices  which  would  be  thought  bad 
business  as  between  individuals  have  been  suggested  in  the  present 
controversy  as  appropriate  for  international  trade  policy ;  and  it 
may  be  well,  therefore,  to  state  clearly  that  I  do  not  deny  that  small 
gains  may  be  snapped  by  sudden  import  duties. 


424  MARSHALL 

15.  For  instance,  if  a  country  is  the  chief  purchaser  of  an  im- 
portant speciality  for  which  a  second  has  exceptional  advantages, 
then  an  import  tax  on  it  would  be  borne  in  the  main  by  the  producer 
for  some  considerable  time.  This  might  occur  in  the  case  of  a  tax 
levied  by  England  on  Greek  currants,  or  on  some  classes  of  heavy 
wines.  There  is  no  important  commodity  the  supply  of  which  is  in 
this  position.  But,  as  we  shall  see  presently,  the  collective  relations 
between  those  countries  which  are  large  exporters  of  wheat,  and 
those  which  are  large  importers  of  it,  have  some  peculiarities. 

16.  Similarly  if  manufacturers  in  any  country  have  adapted 
expensive  plant  to  the  needs  of  a  particular  foreign  market,  they  may 
pay  nearly  the  whole  of  an  unexpected  tax  levied  on  their  goods 
there ;  for  it  is  better  to  work  with  but  low  returns  on  their  invest- 
ment than  to  let  their  plant  lie  idle.  Conversely,  if  a  tax  on  the 
importation  of  certain  goods  is  suddenly  removed  those  producers 
whose  plant  is  specially  adapted  to  those  goods  may  be  able  to  add 
nearly  the  whole  amount  of  the  tax  to  their  price;  and  may  thus 
reap  very  high  profits,  until  new  plant  is  ready  to  meet  the  increased 
demand  resulting  from  the  cessation  of  the  tax. 

*********** 


D.    ILLUSTRATIONS  FROM  RECENT  GERMAN  HISTORY  OF 

THE   EFFECTS   OF   HIGH   TARIFFS   ON   THE   PURCHASING 

POWER  OF  MONEY  AND  WAGES 

18.  Of  course  a  small  change  in  a  country's  fiscal  policy  will  not 
materially  affect  the  purchasing  power  of  money  in  it.  Therefore 
if  the  imposition  of  a  tax  on  any  minor  import  raises  the  price  of  it 
to  her  consumers  by  the  full  amount  of  the  tax,  relatively  to  the 
price  at  which  it  is  to  be  had  in  other  countries  that  have  made  no 
such  change ;  then  it  may  be  concluded  that  the  full  burden  of  that 
tax  falls  on  the  consumers,  until  it  is  shown  that  the  general  pur- 
chasing power  of  money  in  the  first  country  is  lower  than  in  the 
second.    The  onus  probandi  lies  on  those  who  urge  that  it  is  lower. 

19.  There  are,  however,  reasons  why  those  who  advocate  a 
"protective"  policy  should  be  unwilling  to  lay  stress  on  the  un- 
doubted fact  that  the  general  purchasing  power  of  money  is  low  in 
countries  with  a  high  protective  tariff.    For  this  fact  cuts  two  ways. 


ON  FISCAL  POLICY  425 

On  the  one  hand,  it  does  mitigate  that  extra  burden  that  a  country 
seems  to  take  on  itself  by  any  new  import  duty  which  raises  the 
price  of  a  commodity  by  a  given  sum  of  money.  But,  on  the  other 
hand,  it  calls  for  a  similar  deduction  from  any  prima  jade  statistical 
evidence  that  may  be  offered  of  the  prosperity  of  the  country  with 
the  high  tariff.  The  advocates  of  the  high  tariff  gain  a  little  by 
dwelling  on  the  connection  between  high  tariffs  and  high  prices :  but 
they  lose  a  great  deal. 

20.  This  may  be  illustrated  by  the  effects  of  that  movement 
towards  high  tariffs  which  set  in  twenty-five  years  ago  in  Germany. 
In  the  preceding,  comparatively  free  trade  period,  it  was  reckoned 
that  the  purchasing  power  of  money  was  two-thirds  as  high  again  in 
Germany  as  in  England.  (The  common  way  of  putting  it  was: 
''a  thaler  equals  5  fr.,  which  equal  55.")  I  took  considerable  pains 
to  verify  this  statement ;  and  I  found  it  to  be  approximately  true, 
even  after  allowing  for  the  fact  that  many  comforts  and  minor 
luxuries  had  then  to  be  bought  either  from  England,  or  from  world 
markets  which  were  largely  under  English  influence.  Many  of  these 
things  are  now  made  with  as  good  appliances  in  Germany  as  in  Eng- 
land. Further,  German  and  Alsatian  iron  ores  have  been  made 
effective  by  modern  processes  applied  with  consummate  technical 
skill,  and  Germany  is  now  abreast  of  England  in  the  mastery  of 
steel,  which  is  the  master  of  the  world. 

Thirty  years  ago  it  used  to  be  said  that  in  active  occupations  an 
Englishman  could  generally  do  as  much  in  one  hour  as  a  German  in 
one  and  a  half.  But  since  then  the  levelling  up  has  been  almost 
incredible  to  any  one  who  has  not  watched  it  step  by  step ;  and  now 
the  difference  in  effective  value  between  the  hour's  work  in  the 
more  progressive  parts  of  Germany  and  the  English  hour's  work  is 
relatively  small.  Although  by  far  the  greater  part  of  this  progress 
is  unquestionably  due  to  education,  to  improved  food,  and  to  im- 
proved domestic  economy ;  yet  it  may  perhaps  be  conceded  that  a 
small  part  of  it  is  due  to  the  defence  which  the  German  protective 
tariffs  gave  to  weak  nascent  industries  against  the  invasion  of  the 
more  mature  and  stronger  industries  of  some  other  countries,  and 
especially  England. 

But  granting  this,  it  yet  remains  true  that  undiscriminating  im- 
port duties,  imposed  to  gratify  powerful  interests,  and  not  needed 


42  6  MARSHALL 

to  protect  any  nascent  industry,  have  (partly,  indeed,  by  strength- 
ening cartels  or  trade  combinations)  so  raised  prices  against  the 
consumer,  that  the  real  wages  of  the  German  workmen  have  risen 
less  rapidly  than  those  of  the  English.  Money  wages  in  the  more 
.progressive  parts  of  Germany  have  probably  risen  rather  faster  than 
in  England ;  though,  save  in  the  heavy  iron  industry,  the  condition 
of  which  is  temporarily  exceptional,  they  still  lag  behind.  But  the 
prices  of  the  necessaries  of  life  have  risen,  while  those  in  England 
have  fallen ;  so  that  6  marks — instead  of  3,  as  was  the  case  30  years 
ago — are  required,  I  believe,  to  purchase  as  much  of  them  as  55. 
do  in  England  now  [1903].  In  spite  of  Germany's  vast  technical 
advances,  in  spite  of  the  growing  energy  of  her  people,  in  spite  of 
the  development  of  German  iron  ores — while  those  of  England  are 
running  short — I  believe  it  to  be  true  that  the  real  wages  of  the 
German  are  increasing  less  rapidly  than  those  of  the  Englishman; 
and  that  if  Germany  abandoned  protection,  which  has  now  no  con- 
siderable service  to  render  her,  the  wages  of  the  German  would  rise 
a  great  deal.  To  hazard  a  bold  guess,  I  should  expect  them  to  rise 
by  about  a  fifth. 

Part  II.    England's  Fiscal  Policy  considered  with 
Reference  to  the  Economic  Changes  of  the  Last 

Sixty  Years 

F.  ENGLAND'S  FISCAL  POLICY  ASSUMES  THE  RELATIVE 
MATURITY  OF  HER  INDUSTRIES 

*********** 

31.  The  principles  on  which  our  present  fiscal  system  was  based 
sixty  years  ago  seem  to  me  to  be  not  ultimate,  but  derivative.  They 
were  obtained  by  applying  certain  truths,  which  are  as  universal  as 
the  truths  of  geometry  or  mechanics,  to  certain  conditions  which 
were  transitional.  If  these  principles  are  converted  into  dogmas,  the 
same  error  is  made  as  if  the  rules  laid  down  for  building  a  bridge, 
when  the  only  materials  available  consisted  of  pine  logs,  were 
regarded  as  sacred  dogmas  governing  for  ever  the  construction  of 
bridges  for  purposes,  and  under  conditions  of  which  the  original 


ON  FISCAL  POLICY  427 

builders  had  never  dreamed,  and  when  the  materials  to  be  used 
were  steel  or  granite.  .  The  art  of  engineering  involves  an  organised 
study  and  judgment  of  the  proportions  of  diverse  considerations, 
tending  in  different  directions ;  and  no  one  can  be  certain  of  getting 
the  right  proportions  even  for  the  problem  which  he  knows  best. 
It  is  not  by  applying  without  question  the  judgments  as  to  propor- 
tion, which  were  made  by  the  great  men  who  founded  our  present 
system;  but  by  forming  our  own  judgment  on  the  facts  of  our  own 
generation  as  they  did  of  theirs,  that  we  can  show  ourselves  worthy 
to  be  their  followers. 

32.  Looking  back,  it  is  easy  for  us  to  see  that  they  made  a  grave 
error  of  judgment  as  to  the  proportions  of  one  leading  problem  of 
their  own  age,  though  not  of  their  own  country.  They  misjudged 
both  the  needs  and  the  potentialities  of  backward  countries,  and 
especially  of  new  countries.  They  assumed  that  every  country  which 
has  latent  resources  and  faculties  for  an  advanced  industry  will  at- 
tract that  industry  to  her  from  other  countries  as  easily  and  surely 
as  one  county  of  England  would  under  like  circumstances  attract 
it  from  other  counties.  But  this  is  not  true  now,  and  it  was  even 
less  true  then. 

7,7,.  If  the  neighbourhood  of  coal  and  other  causes  concentrate, 
chiefly  in  the  middle-west  of  England,  those  industries  in  which 
man's  command  over  nature  is  rapidly  increasing,  the  benefits  aris- 
ing from  this  new  power  are  in  great  measure  spread  over  the  whole 
country.  Those  born  in  Devonshire  and  Sussex  who  have  a  turn  for 
the  rising  industries,  can  generally  remove  to  them  without  snapping 
their  main  ties  as  human  beings.  But  a  new  country  which  is  domi- 
nantly  rural,  which  lacks  the  stimulus  and  culture  of  a  nervous  town 
life,  and  which  has  no  access  to  the  economies  of  manufacture  on  a 
large  scale,  derives  comparatively  little  consolation  from  knowing 
that  there  are  busy  hives  of  industry  and  thought  in  remote  places. 

34.  The  difficulties  of  the  pioneers  of  manufacturing  industry  in 
a  new  or  even  in  an  old  country  were  much  greater  sixty  years  ago 
than  now.  It  was  rather  more  difficult  then  to  induce  skilled  artisans 
of  good  character  to  change  their  homes.  More  depended  on  rules 
of  thumb ;  and  less  could  be  done  by  the  quick  intelligence  of  the 
worker  and  the  scientific  and  technical  studies  of  the  employer.  The 
leaders   of   improvements   now   are   often   not   machine-users,    but 


42  8  MARSHALL 

machine-makers ;  and  they  are  always  glad  to  fit  up  new  works 
with  better  appliances  than  the  average  of  those  which  are  to  be 
found  in  the  chief  homes  of  such  machines  where  some  of  the  plant 
must  be  at  all  events  a  few  years  old.  But  early  in  last  century  it 
was  difficult  for  any  one  outside  a  trade  to  get  the  best  appliances ; 
and  if  he  imported  expensive  machinery,  and  any  of  it  was  broken 
by  operatives  to  whom  it  was  strange,  he  could  not  always  get  the 
repairs  made  well  except  in  the  place  from  which  he  had  bought  it. 
For  the  system  of  interchangeable  parts  did  not  exist ;  and  there 
were  no  repairing  shops,  except  in  England,  and  perhaps  Belgium  and 
France,  which  were  to  be  compared  with  those  which  are  now  to  be 
found  even  in  second-rate  towns  in  almost  every  new  country.  And 
to  these  inevitable  difficulties  there  were  added  frequent  applications 
of  the  force  of  large  English  capitals  in  underselling,  even  at  a  loss, 
pioneer  manufacturers. 

35.  List  and  Carey,  the  great  German  and  American  founders  of 
modern  protective  policy,  insisted  on  two  fundamental  propositions : 
one  was  that  Free  Trade  was  adapted  to  the  industrial  stage  which 
England  had  reached,  and  the  other  that  State  intervention  was 
required  on  behalf  of  pioneer  industries  in  less  advanced  countries. 
Had  English  Free  Traders  appreciated  fairly  the  force  of  the  second 
of  these  positions,  their  powerful  arguments  that  Protection  was  an 
almost  unmixed  injury  to  England  would  perhaps  have  been  accepted 
by  the  whole  civilized  world.  As  it  was,  this,  their  one  great  error, 
put  many  of  the  most  far-seeing  and  public-spirited  statesmen  and 
economists  in  other  countries  into  an  attitude  of  hostility  to  their 
position  as  a  whole.  It  has  caused,  and  it  is  causing  to-day,  able 
men  to  deny,  directly  or  indirectly,  economic  truths  as  certain  as 
those  of  geometry ;  because  English  predictions,  suggested  by  this 
one  great  error,  have  proved  both  misleading  and  mischievous. 

G.    THE  BASES  OF  ENGLAND'S  FISCAL  POLICY  SIXTY 

YEARS  AGO 

36.  It  has  been  noted  that  at  the  very  time  at  which  English 
economists  were  preparing  the  way  for  uncompromising  Free  Trade, 
England's  exports  consisted  to  so  large  an  extent  of  things  of  which 
she  had  some  partial  monopoly,  that  she  might  hope  then — as  she 


ON  FISCAL  POLICY  429 

cannot  hope  now — to  throw  on  foreigners  some  perceptible  share 
of  the  burden  of  her  import  duties.  It  is  further  to  be  noted  that 
they  did  not  condemn  all  import  duties,  but  only  those  which  were 
levied  in  an  inconvenient  way,  such  as  duties  on  raw  material ; 
or  were  unjust,  such  as  those  which  pressed  heavily  on  the  poor ;  or, 
lastly,  were  differential.  By  differential  taxes  are,  of  course,  meant 
taxes  levied  exclusively  or  with  special  weight  on  commodities  which 
are  produced  in  certain  places  or  by  certain  methods,  or  are  imported 
by  certain  routes  or  in  certain  ships ;  while  other  commodities,  capa- 
ble of  serving  more  or  less  well  the  same  needs,  are  treated  differ- 
entially, and  escape  the  tax  in  whole  or  in  part. 

37.  They  objected  to  a  differential  tax  that  it  set  consumers  and 
traders  on  evasions,  either  by  substituting  for  the  taxed  commodity 
some  other  which  was  less  serviceable,  but  not  taxed ;  or  by  obtain- 
ing the  commodity  in  part  from  some  other  and  more  costly  source 
of  supply.  In  so  far  as  either  of  these  substitutions  was  made,  the 
consumer  was  prejudiced,  and  the  revenue  gained  nothing:  it  was 
only  in  so  far  as  the  tax  was  not  evaded  that  the  revenue  gained 
all  that  the  consumer  lost — subject  only  to  deductions  for  cost  of 
collections,  &c.  They  found  that  in  a  few  exceptional  cases,  such  as 
tea,  coffee,  tobacco,  &c.,  there  was  very  little  evasion  (unless  by 
smuggling),  and  therefore  little  waste.  But  they  found  by  a  study 
of  detail,  and  not  by  any  general  or  a  priori  reasoning  that  in  the 
case  of  all  commodities  for  which  the  English  climate  was  suitable, 
or  for  which  inferior  substitutes  could  be  obtained,  the  evasions 
caused  by  a  tax  were  very  great ;  the  waste  was  in  fact  so  great  as 
to  exceed  many  times  the  small  part  of  the  burden  of  the  tax  which 
could  be  thrown  upon  foreigners.  They  therefore  advocated  the 
abolition  of  all  such  taxes  as  contrary  to  the  principle  of  economy 
in  taxation. 

38.  A  chief  corner-stone  of  our  present  fiscal  policy  is  the  great 
truth  that  the  importation  of  goods  which  can  be  produced  at  home 
does  not  in  general  displace  labour,  but  only  changes  the  direction 
of  employment.  Of  course,  any  violent  change  is,  to  some  extent, 
an  evil ;  but  there  is  a  strong  prima  facie  possibility  that  if  the  busi- 
ness men  of  a  country,  when  left  to  follow  their  own  judgment, 
decide  that  it  would  be  more  costly  to  make  certain  goods  at  home 
than  to  import  them  in  exchange  for  other  home-produced  goods  for 


430  MARSHALL 

which  there  is  a  foreign  demand,  their  judgment  is  right.  Unfor- 
tunately, however,  when  those  in  the  industries,  with  which  the 
imported  goods  compete,  set  themselves  to  persuade  the  public  and 
Government  that  a  protective  import  duty  should  be  levied,  their 
private  interests  are  at  a  great  strategic  advantage  in  competing  with 
those  of  the  public.  For  it  is  possible  to  point  to  the  particular 
places  in  which  additional  employment  would  be  given  by  the  tax. 
It  is  easy  to  find  out  the  particular  employers  and  workmen  whose 
profits  and  wages  would  be  raised  by  it ;  to  invite  the  employers 
to  subscribe  to  a  "campaign  fund"  on  its  behalf;  and  to  urge  both 
employers  and  employed  to  exert  all  the  political  influence,  direct 
and  indirect,  which  they  possess,  in  putting  pressure  on  the  Legisla- 
ture in  their  favour.  Good  strategy  prompts  that  as  much  as  possible 
of  the  argument  and  appeal  in  the  special  interests  of  any  one 
industry  should  come,  not  from  those  who  have  a  direct  stake  in 
that  particular  industry,  but  from  others  who  have  a  "log-rolling" 
understanding  with  them.  In  earlier  times,  as  now,  unscrupulous 
politicians  would  boast  that,  by  going  from  one  constituency  to 
another,  and  holding  before  each  a  protective  duty  which  would  give 
a  visible  bounty  to  a  considerable  portion  of  the  constituency,  they 
could  work  up  an  eager  cry  for  a  protective  policy,  and  could  thus 
shout  down  any  arguments  based  on  the  general  interest. 

Those  who  cared  more  for  the  well-being  of  the  masses  of  the 
people  than  for  class  interests  or  for  political  power,  found  them- 
selves in  a  difficult  position.  For,  though  they  knew  that  such  taxes 
must  lessen  employment  and  lower  real  wages  in  the  aggregate ;  and 
that  those  industries  which  gained  by  the  taxes  would  gain  at  the 
expense  of  a  greater  aggregate  loss  to  other  industries  ;  yet  they  could 
not  always  point  out  the  particular  industries  which  would  suffer 
most :  while  the  far  more  numerous  workers,  who  had  nothing  to 
gain  by  such  taxes,  had  seldom  any  organisation  and  were  not  vocal. 
Thus  the  benefits  of  such  taxes,  because  easily  seen  and  described 
by  persons  who  could  easily  make  themselves  heard,  were  apt  to 
count  at  the  polling  booth  and  even  in  the  counsels  of  statesmen  of 
upright  intentions,  for  more  than  the  evils.  For  those  evils,  though 
greater  in  the  aggregate,  were  less  easily  seen;  and  they  did  not 
directly  appeal  to  vocal  classes. 


ON  FISCAL  POLICY  431 

39.  Fortunately  for  the  success  of  Free  Trade,  many  of  the  pro- 
tective duties  then  levied  were  ill-chosen ;  they  pressed  on  raw 
materials,  and  thus  limited  employment  in  a  conspicuous  way :  and 
the  evils  of  one  of  them^ — that  which  fell  upon  the  food  of  the 
people — were  palpable  enough.  But  this  accidental  gain  has  some- 
what diverted  attention  from  the  general  argument  by  which  econo- 
mists proved  that  protective  taxes  lessened  rather  than  increased  the 
aggregate  employment,  wages,  and  profits.  It  is,  therefore,  impor- 
tant to  lay  stress  on  that  argument. 

40.  The  argument  starts  from  the  fact  that  employment  in  mak- 
ing a  thing  is  not  provided  by  the  mere  desire  to  have  it,  but  by  that 
desire  combined  with  the  appliances  for  making  it,  and  the  means  of 
supporting  those  at  work.  The  older  economists  expressed  them- 
selves badly,  and  laid  too  great  stress  upon  the  capital  stocks  of 
machinery,  raw  material,  food,  &c. ;  whereas  more  recent  economists 
lay  greater  stress  on  that  net  inflow  of  new  supplies  of  food,  raw  mate- 
rial, machinery,  manufactured  products,  &c.,  together  with  personal 
services  which  constitutes  the  national  income  or  dividend.  This 
change  of  emphasis  is  very  important  in  some  connections,  but  not 
in  regard  to  the  particular  point  now  in  hand.  Then,  as  now,  the 
basis  of  economic  doctrine  was  that  the  source  of  all  wages  and 
profits  (as  well  as  rents)  was  in  the  aggregate  efficiency  of  national 
production ;  things  obtained  from  foreigners  in  exchange  for  recent 
exports,  or  as  interest  on  exports  loaned  in  earlier  years,  being 
counted  in  place  of  the  said  exports. 

The  economists  then  argued :  — 

Firstly,  whatever  increases  this  total  efficiency  of  production  in- 
creases that  aggregate  supply  of  goods  (of  past  and  recent  make) 
which  affords  employment  and  income  (wages,  profits,  and  rent) 
to  the  various  classes  of  the  nation. 

Secondly,  if  goods  which  can  be  produced  at  home  are  yet  im- 
ported freely  from  abroad,  that  shows  that  they  can  be  got  generally 
at  less  cost  by  making  other  things  with  which  to  buy  them  from 
abroad  than  by  the  direct  method  of  making  them  at  home. 

[There  may  be  exceptional  cases  in  which  goods  are  sold  with 
but  little  attention  to  cost  of  production ;  and  there  may  be  other 
cases  when  a  home  industry  is  temporarily  disorganised,  and  it  is 


432 


MARSHALL 


reasonable  for  the  public  to  incur  some  sacrifice  for  its  relief.  But 
such  cases,  because  exceptional  and  on  a  small  scale,  have  little 
relevance  to  this  broad  issue.] 

Thirdly,  therefore  a  tax  which  puts  obstacles  in  the  way  of  the 
importation  of  things,  which  consumers  prefer  to  buy  from  abroad, 
does  not  enlarge  employment  or  raise  wages ;  it  is  not  in  the  interest 
of  "producers."  It  is  sure  to  be  in  the  interest  of  some  producers 
(if  among  producers  are  counted  landlords  and  other  owners  of 
natural  sources  of  production).  But  it  is  sure  also  to  injure  other 
producers  more  than  it  benefits  the  favoured  group ;  because  it 
lessens  the  aggregate  flow  of  desirable  things  available  as  a  basis 
of  employment  and  for  distribution  among  the  various  classes  of 
the  nation. 

This  fundamental  truth  is,  of  course,  not  inconsistent  with  the 
coimsel  that,  as  the  prudent  husbandman  puts  seed-corn  into  the 
earth,  so  a  nation  should  be  ready  to  sacrifice  something  of  present 
income  in  order  to  develop  industries  which  are  immature,  and 
perhaps  exposed  to  the  competition  of  others  which  are  strong.  But 
this  counsel  had  no  application  to  England,  because  her  industries 
were  relatively  mature. 

41.  The  founders  of  our  present  system  had  to  combat  the  objec- 
tion that,  though  Free  Trade  might  be  for  the  advantage  of  all  na- 
tions if  adopted  by  all  nations,  it  was  a  mistake  to  open  English 
ports  freely  unless  and  until  foreigners  would  reciprocate  this 
generosity.    To  that  two  replies  were  made. 

The  first  was  that  foreigners  would  certainly  adopt  England's 
policy  as  soon  as  they  saw  how  successful  it  was.  The  events  of  the 
next  few  years  gave  some  support  to  this  hope.  But  it  was  based 
on  a  misconception  of  the  position.  It  ignored  the  fact  that  protec- 
tion to  immature  industries  is  a  very  great  national  good  ;  and  that, 
though  that  good  may  be  bought  at  too  great  a  cost,  it  would  have 
been  foolish  for  nations  with  immature  industries  to  adopt  England's 
system  pure  and  simple. 

Their  second  answer  was  sufficient  by  itself,  and  was  complete 
without  a  flaw.  It  was  that  if,  in  spite  of  taxes  levied  by  other 
nations  on  her  goods,  she  could  get  them  in  exchange  for  her  own 
at  less  cost  than  she  could  make  goods  like  them  for  herself,  it 
was  in  her  interest  to  do  so.    Of  course,  here  again  there  might  be 


ON  FISCAL  POLICY  433 

exceptional  cases.  It  might  be  possible  to  retaliate  by  taxes,  a  part 
of  the  burden  of  which  would  be  borne  by  foreign  consumers  of 
English  goods.  But  as  has  already  been  noted,  it  was  decided  not 
to  try  for  such  small  gains. 

42.  A  suggestion  of  more  practical  importance  was  that  the  re- 
mission of  taxes  on  goods  coming  from  any  country  should  be  made 
conditional  on  the  lowering  of  the  taxes  levied  by  that  country  on 
English  goods.  This  course  was  adopted  in  some  cases.  But  it  was 
not  in  harmony  with  the  large  and  bold  comity,  nor  with  England's 
leadership  in  that  comity  as  in  industry,  which  were  the  glory  of  the 
great  and  noble,  if  somewhat  too  sanguine,  men  who  threw  England's 
ports  open  as  wide  and  as  quickly  as  they  could. 

43.  This  decision  of  theirs  has  not  the  strength  of  a  scientific 
demonstration.  It  does  not  rank  with  their  refutation  of  the  asser- 
tion that  the  importation  of  goods  which  can  be  produced  at  home 
tends,  as  a  rule,  to  lessen  employment  and  to  depress  real  wages. 
On  the  contrary,  it  is  based  on  a  judgment  of  relative  quantities ; 
and  such  judgments  are  at  best  fallible,  even  for  the  time  and  place 
in  which  they  are  held. 

And,  further,  relative  quantities  change  rapidly  even  in  an  age 
of  apparent  stagnation ;  while  the  last  sixty,  and  especially  the  last 
twenty,  years  have  been  full  of  subversive  changes.  Each  age  must 
judge  such  matters  for  itself :  and  none  has  as  yet  been  called  on  to 
judge  for  itself  so  independently  as  that  which  is  now  opening  out. 

H.    TRANSITION  TO  PRESENT  CONDITIONS 

44.  To  any  one  who  approaches  with  an  open  mind  the  fiscal 
problem  adopted  by  England  sixty  years  ago,  there  appears  a  strong 
presumption  that  the  more  perfectly  it  was  adapted  to  the  condi- 
tions of  that  time  the  more  certainly  would  it  fail  to  meet  exactly 
the  widely  different  conditions  of  the  present  time.  Even  if  all 
the  chief  forces  in  operation  now  had  been  working  then,  the 
great  changes  in  their  relative  proportions  must,  it  might  reason- 
ably be  supposed,  have  called  for  great  changes  in  the  policy  designed 
to  meet  them. 

I  for  one  was  so  much  impressed  by  those  arguments  of  Carey 
and  his  followers,  which  had  found  scarcely  any  echo  in  English 


434  MARSHALL 

literature,  that  I  went  to  the  United  States  in  1875  to  study  the  prob- 
lems of  national  industry  and  international  trade  from  the  American 
point  of  view :  and  I  was  quite  prepared  to  learn,  not  indeed  that  the 
American  system  was  applicable  to  England,  but  that  it  might  con- 
tain ideas  capable  of  adaptation  to  English  conditions. 

I  came  back  convinced  that  a  protective  policy  in  fact  was  a  very 
different  thing  from  a  protective  policy  as  painted  by  sanguine 
economists,  such  as  Carey  and  his  followers,  who  assumed  that  all 
other  people  would  be  as  upright  as  they  knew  themselves  to  be, 
{  and  as  clear-sighted  as  they  believed  themselves  to  be.  I  found  that, 
however  simple  the  plan  on  which  a  protective  policy  started,  it 
was  drawn  on  irresistibly  to  become  intricate ;  and  to  lend  its  chief 
aid  to  those  industries  which  were  already  strong  enough  to  do 
without  it.  In  becoming  intricate  it  became  corrupt,  and  tended 
to  corrupt  general  politics.  On  the  whole,  I  thought  that  this 
moral  harm  far  outweighed  any  small  net  benefit  which  it  might  be 
capable  of  conferring  on  American  industry  in  the  stage  in  which 
it  was  then. 

Subsequent  observation  of  the  course  of  politics  in  America  and 
elsewhere  has  strengthened  this  conviction.  It  seems  to  me  that  the 
policy  adopted  in  England  sixty  years  ago  remains  the  best,  and  may 
probably  remain  the  best,  in  spite  of  increasingly  rapid  economic 
change,  because  it  is  not  a  device,  but  the  absence  of  any  device.  A 
device  contrived  to  deal  with  any  set  of  conditions  must  become 
obsolete  when  they  change.  The  simplicity  and  naturalness  of  Free 
Trade — that  is  the  absence  of  any  device — may  continue  to  out- 
weigh the  series  of  different  small  gains  which  could  be  obtained  by 
any  manipulation  of  tariffs,  however  scientific  and  astute. 

45.  I  proceed  to  consider  some  of  the  changes  which  may  be 
urged  as  affording  a  prima  jacie  case  for  reconsidering  the  fiscal 
policy  adopted  by  England  sixty  years  ago.  They  may  be  roughly 
classified  thus :  — 

(i)  The  increase  in  the  strength  and  purity  of  Government  in  its 
administrative  machinery,  and  the  broadening  of  the  func- 
tions which  it  is  expected  to  perform,  and  does  perform, 
.  with  general  approval. 

(ii)  The   advance   of   the   United    States,    Germany,   and   other 
countries. 


ON  FISCAL  POLICY  435 

(iii)  The  tendency  to  an  increase  in  the  taxes  levied  both  by  old 
and  new  countries  on  the  importation  of  manufactured 
produce. 

(iv)   Changes  affecting  England's  industrial  leadership. 

(v)  The  growth  of  powerful  industrial  aggregations  and  combi- 
nations, fostered  by  tariffs  and  other  Government  favours, 
whose  power  to  manipulate  trade  gives  cause  for  anxiety. 

(vi)  The  new  possibilities  of  closer  relations  between  England  and 
other  English-speaking  countries,  resulting  partly  from  the 
development  of  electrical  and  steam  communication. 


J.  THE  ADVANCE  OF  THE  UNITED  STATES,  GERMANY, 
AND  OTHER  COUNTRIES 

51.  As  the  United  States,  Germany,  and  other  countries  have 
advanced  in  industrial  efficiency,  their  growing  wealth  has  enabled 
them  to  consume  very  largely  increased  quantities  of  all  those  goods 
which  England  is  specially  expert  in  producing,  and  also  to  produce 
many  goods  which  are  serviceable  to  her  either  for  direct  consump- 
tion or  for  use  in  her  industries.  Their  progress  has  thus  improved 
her  position  in  many  ways,  while  injuring  it  in  others. 

Old  countries  cannot  in  any  case  expect  to  grow  as  rapidly  as 
those  which  are  only  just  beginning  to  develop  some  of  the  best  of 
their  resources.  Still  less  can  they  hope  to  do  so  if  some  of  their 
own  best  mineral  and  other  resources  are  running  short.  By  far 
the  larger  part  of  whatever  relative  retrogression  England  may  be 
showing,  as  compared  with  the  United  States  and  Germany,  is  di- 
rectly traceable  to  the  recent  development  of  their  great  resources. 

52.  The  United  States  present  a  unique  combination  of  agricul- 
tural and  mineral  riches  worked  in  a  temperate  climate  by  a  mixture 
of  races  of  great  energy  and  alertness.  The  material  resources  of 
national  prosperity  are  a  good  climate  and  large  areas  yielding  gen- 
erous returns  to^labour  in  the  production  of  staple  foods  and  textile 
materials,  together  with  coal  or  water  power,  and  minerals.  In  all 
these  respects,  excepting  climate  and  coal,  the  United  States  is 
incomparably  better  supplied  than  England  is ;  and  in  the  earlier 
stages  of  nearly  every  great  branch  of  her  production,  labour  of  a 


436  MARSHALL 

given  efficiency  will  go  much  further  than  in  England — in  some 
cases  more  than  twice  as  far.  The  best  English  ideas  have  nearly 
always  been  accessible  to  Americans.  When  early  in  the  last  cen- 
tury England  took  great  pains  to  prevent  the  exportation  of  her 
best  machines,  the  manufacturers  of  Europe  set  themselves  to  smug- 
gle the  machines  or  drawings  of  them  out  of  England  piecemeal 
and  under  various  disguises.  But  the  prouder  Americans  inquired 
exactly  what  was  the  operation  which  a  machine  took  over  from  the 
human  hand,  and  then  devised  one  for  themselves ;  and  it  sometimes 
turned  out  better  than  the  English  one.  Foreign  trade,  therefore, 
is  not  necessary  to  the  United  States.  Her  domestic  trade  is  larger 
than  that  of  the  whole  Western  world  was  when  she  achieved  her 
independence.  Protection  could  not  possibly  do  her  much  harm : 
and  it  is  probable  that  the  help  given  by  her  to  a  few  industries, 
which  really  needed  help,  about  compensated  for  the  economic  loss 
(but  not  for  the  moral  injury)  caused  in  other  directions  by  her 
protective  policy. 

53.  As  to  Germany,  it  has  been  suggested  in  §  20  that  the  pro- 
tective policy  to  which  she  has  latterly  given  herself  has,  on  the 
whole,  hindered  rather  than  helped  the  use  which  she  has  made  of 
the  high  industrial  energies  of  a  population  very  much  greater  than 
that  of  the  United  Kingdom.  If  we  take  coal  and  iron  together, 
and  remember  that  the  very  rich  beds  of  inferior  iron  ore  in  Lux- 
emburg and  Lorraine  have  been  rendered  available  for  making  steel 
by  recent  inventions  ;  her  mineral  resources  appear  about  equal  to 
those  of  this  country :  and,  of  course,  her  agricultural  resources  are 
much  larger.  Her  position  for  foreign  commerce  is  in  some  respects 
better  than  that  of  England.  The  ocean  routes  from  her  ports  are 
indeed  a  little  longer  than  those  from  English  ports ;  but  even  here 
there  is  some  compensation,  because  her  ships  can  make  up  their 
cargoes  in  convenient  ports  of  Holland,  Belgium,  France,  and  Eng- 
land. And,  what  is  of  far  greater  importance,  she  has  almost 
exclusive  access  to  large  areas  of  Eastern  Europe  which  are  ready  to 
use  Western  goods,  but  are  not  yet  ready  to  make  si^ch  goods  them- 
selves; and  she  is  able  to  send  light  goods  to  them  in  through 
railway  wagons  cheaply  and  quickly.  In  fact,  the  greater  part  of 
the  increase  in  Germany's  foreign  trade  during  recent  years,  of  which 


ON  FISCAL  POLICY  437 

much  has  been  written,  is  with  these  countries :  it  is  due  to  advan- 
tages which  scarcely  any  fiscal  policy  could  destroy. 

54.  Germany,  like  the  United  States,  owes  much  of  her  strength 
to  the  large  population  within  her  own  borders,  among  whom  there 
is  absolute  free  trade.  One  of  the  chief  causes  which  retarded  her 
rise  was  the  fact  that  Prussia,  the  largest  and  most  vigorous  German 
State,  was  not  a  compact  unit,  but  a  number  of  disjointed  fragments 
divided  from  one  another  by  artificial  frontiers.  The  Zollverein, 
following  an  earlier  Swiss,  and  a  still  earlier  French,  precedent,  was 
the  most  important  movement  towards  free  trade  that  the  world 
has  ever  seen,  except  the  contemporary  reform  of  the  British  fiscal 
system.  It  abolished  in  every  direction  artificial  hindrances  to  the 
"simple"  and  "natural"  tendency  of  each  man  to  deal  with  those 
persons  who  are  best  able  to  meet  his  wants  in  return  for  his  meet- 
ing theirs.  It  stopped  the  laborious  passing  of  goods  in  bond  from 
one  Prussian  island  to  another ;  it  put  an  end  to  vexatious  inquiries, 
and  diminished  the  labour  of  custom-house  officers.  In  short,  its 
influence  was  largely  in  the  opposite  direction  to  that  which  would 
be  exerted  by  the  commercial  federation  of  the  British  Empire ; 
though  in  many  respects  similar  to  that  which  would  be  exerted  by 
a  commercial  federation  of  Anglo-Saxondom,  if  that  were  possible. 

K.    THE  PRESSURE  OF  FOREIGN  TARIFFS  INCREASES  WITH 
THEIR  NUMBER^  AND  MORE  THAN  IN  PROPORTION  TO  IT. 
HIGH   TARIFFS   LEVIED    IN    THE   NEW   WORLD    MAY    ULTI- 
MATELY BE  VERY  BURDENSOME  TO  THE  OLD 

55,  In  discussing  the  incidence  of  a  tax  on  imports  in  Part  I., 
the  keynote  of  our  main  argument  was  that  the  country  B  whose 
goods  were  taxed  would  seek  other  markets  for  them,  until  they 
had  risen  in  value  in  the  taxing  country  A  sufficiently  to  throw  nearly 
the  whole  burden  of  the  tax  on  the  consumer.  The  part  which  would 
be  borne  by  the  producers  in  B  might  indeed  be  temporarily  great 
if  they  had  made  their  arrangements  specially  for  sale  in  A's  mar- 
kets, and  in  some  other  exceptional  cases.  But,  as  a  rule,  in  the 
actual  world,  B  would  quickly  find  some  other  markets  for  her 
goods,  nearly  as  good  as  A's  had  been  before  the  tax :  and  she  would 


438  ,         MARSHALL 

have  a  further  resource  in  directing  new  applications  of  her  capital 
and  labour  to  other  branches  of  production  for  home  or  foreign 
markets ;  and  possibly  even  in  diverting  some  capital  and  labour, 
which  were  already  in  the  taxed  industry,  to  others.  There  is  then 
a  presumption  that  (save  in  the  exceptional  case  in  which  nearly  all 
A's  exports  have  a  monopoly  value)  A's  consumers  will  bear  nearly 
the  whole  burden  of  the  taxes  imposed  on  B's  goods ;  a  burden  which 
could  be  measured  (after  allowance  for  changes  in  the  international 
distribution  of  gold,  and,  therefore,  in  general  prices)  by  the  change 
in  price  of  B's  goods,  duty  paid,  in  A's  ports,  as  compared  with  their 
price  in  others  where  no  new  tax  had  been  levied.  That  is  to  say, 
it  was  assumed  that  A's  taxes  on  B's  goods  would  not  exert  a  very 
great  influence  on  the  value  of  B's  goods  in  the  ports  of  other  coun- 
tries. For,  if  A  puts  a  tax  on  one  of  B's  goods,  B  can  send  it  to  C, 
D,  E,  &c.,  in  rather  larger  quantities,  without  appreciably  glutting 
their  market :  or  she  can  send  other  goods  to  A  or  to  C,  D,  E,  &c. 

56.  But  the  position  is  greatly  changed  if  A,  C,  D,  E,  &c.,  all  put 
a  heavy  tax  on  one  of  B's  goods  concurrently.  It  matters  not  whether 
they  do  it  by  agreement  in  a  sort  of  conspiracy,  or  are  merely  im- 
pelled severally  to  it  by  the  consideration  of  their  own  interests.  In 
either  case  B  must  very  much  diminish  her  export  of  it,  or  else 
bear  a  large  part  of  the  burden  of  the  tax.  And  if  A,  C,  D,  E,  &c., 
all  put  heavy  taxes  on  all  B's  exports,  then  B  is  almost  sure  to  bear 
a  large  part  of  the  burden.  She  might,  indeed,  turn  much  of  her 
capital  and  labour  chiefly  to  producing  things  for  her  own  consump- 
tion :  but  she  is  almost  sure  to  be  in  urgent  need  of  some  imports, 
and  in  order  to  obtain  them  she  must  export.  If  several  of  her  goods 
are  in  urgent  demand  abroad,  she  may  be  able  to  get  most  of  what 
she  wants  to  import  by  exporting  rather  reduced  quantities  of  these 
goods,  and  only  of  these  goods.  Their  scarcity  will  give  them  high 
purchasing  power  abroad,  and  she  will  then  not  pay  a  very  great 
part  of  the  foreign  import  duties :  though  she  will,  of  course,  be 
hampered  and  inconvenienced  in  many  ways.  If,  however,  she  has 
no  exports  which  approach  to  a  monopoly  value  abroad,  she  must 
turn  her  attention  more  and  more  to  providing  for  home  consump- 
tion ;  and  she  must  be  content  to  allow  a  considerable  part  of 
the  burden  of  foreign  duties  on  her  exports  to  enter  into  the  real 
cost  to  her  of  whatever  net  imports  she  requires.    (The  foreign  raw 


ON  FISCAL  POLICY  430 

material  which  enters  into  her  exports  does  not  count  as  an  import 
for  this  purpose.  Nor,  again,  do  those  which  she  draws  in  payment 
of  interest,  &c.,  on  capital  which  she  has  already  exported ;  such  im- 
ports are  not  affected  by  the  taxes  levied  abroad  on  her  exports.) 

57.  England  is  undoubtedly  in  a  worse  position  than  she  would 
be  if  the  commodities  for  which  she  has  a  special  aptitude  were  not 
generally  liable  to  heavy  taxes  abroad.  But  the  taxes  on  her  im- 
ports levied  by  a  country  in  the  same  industrial  phase  with  herself 
will  always  be  of  relatively  small  importance  to  her.  It  is  generally 
to  the  advantage  of  both  that  they  should  exchange  textiles  or  metal 
goods  whenever  merchants  see  their  way  to  a  profitable  exchange. 
But  if  England  made  things  for  home  consumption  with  the  capital 
and  labour  with  which  she  makes  her  exports  to  (say)  Germany, 
and  Germany  acted  in  like  manner,  neither  of  them  would  be 
seriously  injured.  To  put  an  artificial  obstacle  in  the  way  of  the 
trade  would  be  unwise ;  but  its  total  economic  consequences  would 
be  small  after  the  immediate  effect  of  the  disturbance  had  passed 
away. 

Nor  could  England  be  very  seriously  injured  even  by  a  concurrent 
imposition  of  taxes  on  her  imports  on  the  part  of  all  countries  in  the 
same  industrial  phase  with  herself.  She  might  indeed  then  be  unable 
to  market  abroad  any  great  quantity  of  those  refined  machines  and 
other  implements,  for  which  there  is  little  demand  except  in  highly 
advanced  countries ;  and,  therefore,  she  would  be  a  little  restricted 
in  the  economies  of  production  on  a  large  scale  in  this  important 
group  of  manufactures.  But  her  own  markets  would  afford  scope  in 
almost  every  branch  of  such  work  for  several  establishments  of  the 
largest  size  which  can  advantageously  be  controlled  by  single  man- 
agement ;  and  therefore  her  loss  under  this  head,  though  consider- 
able, would  not  be  very  great.  She  would  give  more  attention  to 
products  suitable  for  sparsely  peopled  countries ;  and  this  would  help 
her  in  obtaining  such  crude  mineral  and  agricultural  products  as 
she  needed. 

58.  Nor  is  there  any  very  urgent  danger  to  be  feared  in  the  near 
future  from  the  concurrent  imposition  of  heavy  import  duties  on 
manufactures  by  sparsely  peopled  countries.  For  most  of  those 
countries  are  still  in  urgent  need  of  capital ;  and  they  cannot  afford 
to  divert  much  of  it  from  developing  their  abundant  resources  to 


440 


MARSHALL 


setting  up  modern  steel  and  other  industries,  which  may  absorb  a 
thousand  pounds  worth  of  capital  or  more  for  each  person  to  whom 
they  give  employment.  Consequently,  many  manufactured  products 
will  long  continue  to  be  imported  on  a  large  scale  even  into  the 
more  highly  developed  new  countries.  And  there  will  also  long 
remain  large  areas  of  the  world,  in  which  there  are  no  organised 
industries ;  and  where  the  door  must  be  kept  fairly  open  to  the  large 
majority  of  Western  products. 

But  the  world  is  being  peopled  up  very  quickly.  It  is  but  a  cen- 
tury since  Britain  accumulated  her  great  Public  Debt :  and  before 
another  century  has  passed  the  scene  may  have  changed.  There 
may  then  remain  but  a  few  small  areas  of  fertile  soil,  and  of  rich 
mineral  strata,  which  are  not  so  well  supplied  with  both  population 
and  capital  as  to  be  able  to  produce  most  of  the  manufactured 
products  which  they  require,  and  to  be  able  to  turn  to  a  tolerably 
good  account  most  of  their  raw  products  for  their  own  use.  When 
that  time  comes,  those  who  have  surplus  raw  products  to  sell,  will 
have  the  upper  hand  in  all  international  bargains.  Acting  con- 
currently, whether  by  mutual  agreement  or  not,  they  will  be  in  the 
possession  of  an  unassailable  monopoly ;  and  any  taxes,  however 
oppressive,  which  they  may  choose  to  impose  on  the  only  products 
which  densely  peopled  countries  can  offer  to  them,  will  be  paid 
mainly  by  those  countries.  It  is  this  consideration,  rather  than  the 
prospect  of  any  immediate  danger,  which  makes  me  regard  the 
future  of  England  with  grave  anxiety. 

L.    CHANGES  AFFECTING  ENGLAND'S  INDUSTRIAL 

LEADERSHIP 

59.  The  progress  of  the  arts  and  resources  of  manufacture  has 
benefited  England  more  than  almost  any  other  country  in  one  impor- 
tant but  indirect  way.  It  has  so  reduced  the  cost  of  carriage  by  land 
and  sea  that  raw  materials  and  food  can  come  to  her  even  from  the 
centres  of  great  continents,  at  a  less  cost  than  they  could  come  from 
the  near  neighbourhood  of  the  sea-shores  and  great  rivers  of  the 
Continent  sixty  years  ago ;  and  the  300,000  miles  of  railways  which 
have  been  built  during  the  last  sixty  years  in  America,  Asia,  Africa, 
and  Australia  are  rendering  greater  service  to  Englishmen  than  to 


ON  FISCAL  POLICY  441 

any  other  people,  except  those  in  whose  lands  the  several  railways 
are  placed. 

In  almost  every  other  respect  the  progress  of  the  arts  and  re- 
sources of  manufacture  has  benefited  England  less  than  any  other 
country.  For,  even  sixty  years  ago,  the  excess  of  the  cost  of  the 
manufactures  needed  for  her  own  consumption  over  that  of  the  raw 
material  by  which  they  were  made  was  small.  If  it  could  have  been 
reduced  to  nothing,  she  would  have  gained  by  the  change  very  much 
less  than  she  has  gained  by  the  lowering  of  the  cost  of  imported 
food  and  raw  material  for  her  own  use. 

On  the  other  hand,  countries  which  used  to  be  dependent  on 
imported  manufactures  have  gained  all  round :  they  have  gained  by 
lowered  cost  of  transport,  and  they  have  gained  by  the  lowered  cost 
of  manufacture  of  commodities  for  direct  use ;  and  that  almost 
equally,  whether  these  goods  are  manufactured  by  themselves  or 
imported.  For  competition  compels  England,  Germany,  and  other 
Western  countries  to  give  to  consumers  almost  at  once  the  full 
benefit  of  any  economy  in  manufacturing  processes  which  they 
have  obtained. 

Other  things  being  equal,  an  increase  in  the  efficiency  of  those 
industries  in  which  a  country  is  already  leading  will  increase  her 
foreign  trade  more  than  in  proportion.  But  an  increase  in  the 
efficiency  of  those  in  which  she  is  behind  will  diminish  her  foreign 
trade. 

England  has  recently  [1903]  been  behind  France  in  motor-car 
building,  and  behind  Germany  and  America  in  some  branches  of 
electrical  engineering.  A  great  relative  advance  on  her  part  in  those 
industries  would  enable  her  to  make  for  herself  things  which  she 
had  previously  imported,  and  would  thus  diminish  her  foreign  trade. 
On  the  other  hand,  even  a  small  advance  in  her  power  of  spinning 
very  high  counts  of  cotton  yarn  would  increase  her  foreign  trade 
considerably ;  because  that  is  a  thing  for  which  other  nations  have 
an  elastic  demand,  and  are  at  present  almost  wholly  dependent 
on  England. 

68.  England's  export  trade,  though  still  very  much  larger  in  pro- 
portion to  population  than  that  of  Germany  and  America,  is  not 


442  MARSHALL 

[in  1903]  increasing  as  fast  as  theirs.    But  this  fact  is  not  wholly 
due  to  causes  which  indicate  relative  weakness. 

The  chief  cause  of  it  is  that  the  improvements  in  manufacture  and 
in  transport,  aided  by  Free  Trade,  enable  England  to  supply  her 
own  requirements  as  regards  food,  clothing,  &c.,  at  the  cost  of  a 
continually  diminishing  percentage  of  her  whole  exports.  Her  people 
spend  a  constantly  diminishing  percentage  of  their  income  on  mate- 
rial commodities ;  they  spend  ever  more  and  more  on  house-room 
and  its  attendant  expenses,  on  education,  on  amusement,  holiday 
travel,  &c.  Present  censuses  show  a  progressive  increase  in  the 
percentage  of  Englishmen  who  earn  their  living  by  providing  for 
these  growing  requirements.  That  is  to  say,  the  number  of  English- 
men who  devote  themselves  to  producing  things  which  might  be 
exported  in  return  for  foreign  products  increases  very  slowly.  Of 
course,  if  her  foreign  trade  be  measured  by  the  quantity  of  things 
exported  and  imported,  it  is  increasing  fast ;  for  a  man's  daily  labour 
now  deals  with  a  much  larger  volume  of  goods  in  almost  every  indus- 
try than  formerly.  But  still  it  is  not  increasing  [in  1903]  as  fast  as 
that  of  Germany  and  America.    How  far  is  this  really  an  evil  ? 

69.  American  conditions  are  very  dissimilar  -to  ours.  But  if 
anyone  compares  in  detail  German  and  English  trade  statistics,  he 
will  find  it  difficult  to  point  out  desirable  foreign  commodities  with 
which  England  is  not  the  better  supplied.  The  earnings  of  England's 
capital  invested  in  foreign  countries  and  in  ships  on  the  ocean 
enable  her  to  bring  home  about  a  hundred  and  fifty  millions  worth 
of  commodities  for  her  own  consumption,  in  addition  to  those 
which  she  buys  with  her  nominal  exports.  Her  people  think  that 
these,  taken  together,  are  enough ;  and  prefer  expensive  summer 
holidays  to  increasing  still  further  above  the  German  level  their 
consumption  of  oranges  or  silk.  Who  shall  say  that  they  are  wrong  ? 
It  is  useless  to  point  out  things  which  England  might  export  and 
does  not :  unless  it  can  be  shown  that  the  extra  things,  which  she 
would  be  able  to  import  by  so  doing,  are  more  desirable  than  the 
things  and  services  which  she  is  providing  for  herself  and  which 
she  would  need  to  give  up  in  order  to  make  those  things  for  export. 


ON  FISCAL  POLICY  443 

M.    FOR  ENGLAND,  THOUGH  NOT  FOR  AMERICA,  FREE 
TRADE  IS  ESSENTIAL  TO  LEADERSHIP 

71.  The  position,  then,  is  this:  On  the  one  hand,  England  is 
not  in  a  strong  position  for  reprisals  against  hostile  tariffs,  because 
there  are  no  important  exports  of  hers,  which  other  countries  need 
so  urgently  as  to  be  willing  to  take  them  from  her  at  a  considerably 
increased  cost ;  and  because  none  of  her  rivals  would  permanently 
suffer  serious  injury  through  the  partial  exclusion  of  any  products 
of  theirs  with  which  England  can  afford  to  dispense. 

And,  on  the  other  hand,  it  is  not  merely  expedient — it  is  abso- 
lutely essential — for  England's  hopes  of  retaining  a  high  place  in 
the  world,  that  she  should  neglect  no  opportunity  of  increasing  the 
alertness  of  her  industrial  population  in  general,  and  her  manu- 
facturers in  particular ;  and  for  this  purpose  there  is  no  device  to 
be  compared  in  efficiency  with  the  plan  of  keeping  her  markets  open 
to  the  new  products  of  other  nations,  and  especially  to  those  of 
American  inventive  genius  and  of  German  systematic  thought  and 
scientific  training. 

Further,  it  is  more  necessary  for  her  manufacturers  than  for  any 
others  that  they  should  be  able  to  buy  cheaply,  and  without  friction, 
any  foreign  products — whether  technically  described  as  "manufac- 
tured," or  not — which  they  may  want  at  any  stage  of  their  complex 
and  varied  work.  This  could  not  be  arranged  by  a  system  of  re- 
bates ;  not  even  by  allowing  special  privileges  to  the  "  Improvement- 
trade"  (Veredelungsverkehr).  It  would  require  large  classes  of 
factories  and  workshops  to  be  treated  as  bonded  warehouses.  Or 
rather,  it  would  require  the  conversion  of  many  manufacturing  areas 
into  free-trade  zones,  each  surrounded  by  a  high  wall,  or  a  cordon  of 
revenue  officers. 

In  this  connection  it  should  be  noted  that  taxes  on  commodities 
in  general,  including  those  that  are  free  from  any  differential  taint, 
are  likely  to  press  with  undue  weight  on  the  poorer  classes  of  the 
community.  No  doubt  there  are  a  few  commodities  consumed  ex- 
clusively by  the  well-to-do,  on  which  it  would  be  possible  to  levy 
special  taxes.  But  every  attempt  to  obtain  any  considerable  amount 
of  revenue  from  this  source  has  failed,  and  must  fail :  while  it  causes 
much  more  expense  and  annoyance  to  those  who  are  affected  by  it, 


444  MARSHALL 

than  would  be  caused  by  an  equal  increase  in  their  contributions 
to  such  taxes  as  are  levied  now.  The  main  bulk  of  the  burden  on 
consumable  commodities  falls  on  the  poorer  classes,  for  two  reasons. 
First,  the  poorer  classes  spend  a  much  larger  percentage  of  their 
incomes  upon  commodities  than  the  richer  classes  do.  And,  secondly, 
the  greater  part  of  the  taxes  on  commodities  must,  for  technical 
reasons,  be  specific,  that  is,  apportioned  merely  to  the  quantity  of 
a  thing  of  any  given  kind ;  and  not  ad  valorem,  that  is,  apportioned 
also  to  the  fineness  or  high  quality  of  the  thing  in  its  kind.  There- 
fore such  taxes  amount  to  more  shillings  for  every  pound  that  the 
poorer  classes  spend  on  the  taxed  commodities  than  they  do  for 
every  pound  spent  on  them  by  the  well-to-do. 

The  injustice  of  levying  a  great  portion  of  the  revenue  by  taxes  on 
commodities  is  most  conspicuous  with  regard  to  those  which  enter 
directly  into  consumption.  But  it  extends  also  to  taxes  on  such 
things  as  machinery.  For  the  largest  ultimate  uses  of  machinery 
are  in  the  transport  by  land  and  sea  of  those  massive  foodstuffs  and 
other  things  which  are  chiefly  consumed  by  the  working  classes ; 
and  in  making  the  simpler  forms  of  clothing,  &c.  Probably  about 
twice  as  much  horse  power  is  used  in  providing  for  each  pound's 
worth  of  expenditure  on  commodities  by  the  poor  as  by  the  rich. 
The  great  glory  of  the  fiscal  policy  of  the  latter  two-thirds  of  the 
nineteenth  century  is,  that  it  found  the  working  classes  paying 
a  very  much  greater  percentage  of  their  income  in  taxes  than  the 
rich  did ;  and  that  it  left  them  paying  a  less  percentage.  Sparsely 
peopled  countries,  and  federated  countries,  are  compelled  for  techni- 
cal reasons  to  obtain  a  large  part  of  their  revenues  by  taxes  on 
commodities.    But  England  has  no  excuse  for  that  injustice. 

72.  Though  it  be  true  that  the  import  duties  of  Western  nations 
inflict  greater  loss  on  England  than  they  did  sixty  years  ago,  it 
seems  that  she  stands  to  gain  little  and  to  lose  much  by  any  attempt 
to  coerce  them  into  lowering  their  tariffs.  Especially  does  it  seem 
contrary  to  England's  interests  to  levy  import  duties  with  the  object 
of  giving  English  diplomatists  something  to  bargain  with  when 
discussing  foreign  tariffs.  English  business  would  be  disturbed  by 
the  opinion  that  such  a  duty  was  probable ;  and  again  by  its  actual 
imposition,  and  again  by  the  probability  that  it  would  be  removed, 
and  again  by  its  actual  removal.    It  would  disturb  business  in  every 


ON  FISCAL  POLICY 


445 


way ;  and  it  would  set  particular  classes  of  business  men  on  influenc- 
ing Government,  as  it  has  done  in  other  countries  where  diplomats 
are  intrusted  with  a  power  of  this  kind.  Protective  duties  are  easy 
to  impose,  and  hard  to  remove ;  and  the  suggested  plan  would  lead 
to  a  number  of  protective  taxes  based  on  no  scientific  system,  and 
conducive  neither  to  the  material  nor  the  moral  prosperity  of  the 
country. 

73.  But  England  already  grants  to  every  nation  with  which  she 
deals  better  terms  than  that  nation  gets  from  any  other ;  and  it  is 
not  unreasonable  that  she  should  demand  in  return  the  "most- 
favoured-nation" treatment.  She  should  regard  any  refusal  to 
grant  it  as  an  act  of  deliberate  commercial  hostility,  which  would 
justify  her  in  considering  whether  or  not  it  was  worth  while  to 
make  reprisals.  It  is,  of  course,  true  that  the  existence  of  a  most- 
favoured-nation clause  sometimes  deters  an  astute  German  or  other 
diplomatist  from  pressing  for  specially  low  duties  on  goods  in  the 
production  of  which  England  happens  to  have  some  advantage  over 
his  country,  and  that  in  that  case,  England  gets  no  benefit  from  the 
efforts  of  that  particular  diplomatist.  But  she  is  not  dependent  on 
any  one  such  diplomatist.  Nearly  every  one  who  is  trying  to  get 
any  taxes  on  imports  lowered  on  behalf  of  his  own  country,  is  likely 
to  be  working  for  England's  good  under  this  clause,  unless  he  gives 
himself  a  great  deal  of  trouble  to  avoid  doing  it.  The  few  cases  in 
which  he  takes  the  trouble  are  quoted  over  and  over  again  in  English 
controversial  literature ;  while  little  is  heard  of  the  far  more  numer- 
ous cases  in  which  England's  masterly  policy  of  quiescence  is  re- 
warded by  her  reaping  the  fruits  of  other  people's  excitements, 
quarrels,  and  worries.  The  clause  in  fact  gives  England  nearly  all 
that  she  could  obtain  by  interminable  tariff  wars,  and  at  no  cost. 

It  might,  therefore,  be  well  that  every  foreign  nation  should  know 
that  so  unfriendly  and  unjust  an  act  as  the  refusal  of  most-favoured- 
nation treatment  to  England  would  be  regarded  as  an  unprovoked 
injustice :  and  that  in  extreme  cases  it  would  be  met  by  hostile  re- 
prisals. Such  reprisals  would  be  like  declarations  of  war :  that  is, 
they  would  be  expected  beforehand  to  be  very  expensive ;  and,  even 
if  successful,  to  injure  the  country  which  made  them,  nearly  as 
much  as  the  country  assailed  by  them.  They  would  therefore  make 
use  of  all  the  weapons  of  financial  combat,  concentrated  against  the 


446  MARSHALL 

offenders.  It  would  not  be  a  conclusive  argument  against  any  of 
them  that  it  was  inconsistent  with  the  large-minded,  generous,  and 
simple  principles  which  have  characterised  British  fiscal  policy  for 
the  greater  part  of  a  century. 

74.  One  further  remark  may  be  made  in  this  connection.  It  is, 
that  there  seems  to  be  no  good  ground  for  the  opinion  that  foreign  im- 
ports compete  unfairly  with  British  goods  in  British  markets,  because 
they  have  not  contributed  to  the  expenses  of  maintaining  the  British 
Government.  But,  as  was  pointed  out  long  ago,  this  appears  to  be 
a  mistake.  For  by  far  the  greater  part  of  these  imports  are  received 
in  exchange  for  exports  of  our  goods  and  services ;  including  the 
services  of  those  most  elaborate  machines  known  as  ships,  and  of 
those  highly  skilled  workers  known  as  mariners.  All  these  exports 
have  paid  their  share  of  the  expenses  of  the  British  Government. 
That  share  has  entered  into  their  cost.  That  cost  has  been  defrayed 
by  the  imports  obtained  in  exchange  for  them ;  and  therefore  it  has 
been  paid  by  those  imports. 

It  is  true  that  a  part  of  British  imports  are  received  as  interest,  or 
profits,  on  capital  exported  in  earlier  years :  but  that  capital  orig- 
inally consisted  of  goods  which  had  paid  their  share  of  British 
taxes.  The  question  whether  income  derived  from  foreign  invest- 
ments should  be  liable  to  special  taxation  may  fairly  be  discussed  on 
its  merits,  but  not  in  this  connection :  though  apparently  simple,  it 
seems  to  involve  very  great  difficulties  on  closer  examination. 

N.    TRUSTS  AND  CARTELS 

75.  It  is,  however,  urged  that  special  treatment  is  required  for  the 
products  of  powerful  single  firms  or  combinations  of  firms  which, 
protected  by  a  high  tariff,  sell  at  a  high  price  at  home,  and  find 
additional  employment  for  their  workers  by  producing  goods  to  be 
sold  below  cost  price  abroad.  It  is  further  alleged  that  they  can  sell 
such  goods  more  easily  in  Free-trade  England  than  elsewhere.  The 
economics  of  industrial  aggregation  and  combination  is  a  vast  sub- 
ject ;  but  I  will  venture  to  submit  a  few  fragmentary  remarks  on  it. 

76.  Speaking  generally,  American  trusts  in  the  proper  sense  of  the 
word  have  ceased  to  exist.  What  are  called  "trusts"  are  single 
Corporations  so  vast  as  to  obtain  a  dominant  control  approaching 


ON  FISCAL  POLICY 


447 


to  monopoly  in  some  large  branch  of  industry.  They  aim  at  con- 
structive economies,  and  do  not  always  exert  themselves  much  to 
keep  competition  out  of  the  trade ;  they  boast  that  their  large  scale 
of  buying,  producing,  and  selling  enables  them  to  make  a  profit  at 
prices  which  leave  no  margin  for  smaller  producers.  Especially  in 
their  early  days,  some  of  them  appear  to  have  acted  cruelly  and 
unscrupulously.  But,  as  a  rule,  they  now  avoid  action  which  is 
palpably  against  the  public  weal :  and  it  is  rather  the  fear  of  what 
they  may  do  in  the  future  when  they  are  more  firmly  in  the  saddle, 
than  of  what  they  are  doing  just  now,  which  is  causing  much 
American  thought  to  be  given  to  the  duties  of  the  State  with  regard 
to  them.  The  best  opinion  seems  to  be  that  as  a  Joint-stock  Com- 
pany has  less  right  to  privacy  than  an  individual  business  man,  so 
a  Corporation  of  semi-monopolistic  scope  may  be  fairly  compelled 
to  make  returns  to  the  Government  for  publication  of  a  kind  which 
it  would  not  be  well  to  demand  from  an  ordinary  Company.  If  those 
returns  tend  to  show  that  it  is  making  a  bad  use  of  its  power,  and, 
in  particular,  is  selling  below  cost  price  with  the  set  purpose  of  ruin- 
ing rivals,  it  may  be  required  to  level  up  its  prices,  or  to  level  them 
down  at  its  option,  to  the  same  amount  for  the  same  thing  (cost 
of  carriage  being  allowed  for)  all  over  the  States.  Secondly,  it  is 
urged  that  if  a  trust  sells  more  cheaply  abroad  than  at  home,  it 
thereby  proves  that  it  has  no  right  to  be  defended  by  a  protective 
duty ;  and  though  there  are  several  important  trusts  which  are 
independent  of  the  tariff,  yet  the  growing  power  of  trusts  generally 
is  causing  many  able  and  influential  persons,  who  formerly  defended 
the  policy  of  Protection,  to  turn  towards  Free  Trade. 

77.  The  discussion  of  the  combination  policy  in  Germany,  though 
in  advance  of  that  in  this  country,  lags  behind  that  of  the  United 
States ;  but  in  the  main  tends  in  the  same  direction.  The  cartels  are, 
however,  very  different  from  the  trusts.  They  are  federations  more  or 
less  strongly  knit  together  and  not  amalgamated.  Each  firm  retains 
much  autonomy,  except  in  the  matter  of  selling,  and  in  some  cases  of 
buying.  Their  constructive  economies  are  not,  as  a  rule,  to  be  com- 
pared to  those  of  the  American  trusts,  but  they  effect  important 
economies  in  the  advertising  and  distribution  of  their  products ;  and 
they  are  ruthless  in  restricting  their  supplies  to  the  home  consumer, 
in  order  to  compel  him  to  pay  an  artificially  high  price  for  them. 


448  MARSHALL 

The  strongest  cartels  are,  as  might  be  expected,  in  trades  which 
make  half-finished  goods.  They  often  sell  their  products  to  English 
and  other  manufacturers  at  prices  which  enable  the  finished  product 
made  of  them  to  undersell  the  German  product  in  foreign  markets. 
This  is  only  one  of  many  instances  of  the  intricacy  and  friction  which 
their  system  introduces,  and  is  tending  to  form  a  strong  public 
opinion  against  it.  [P.S.  1908.  The  policy  of  cartels  has  become  less 
aggressive  towards  the  foreign  producer  and  less  oppressive  to  the 
home  producer  since  1903.  The  chief  causes  of  this  change  appear 
to  be  (i)  the  teachings  of  experience;  (2)  the  rise  of  a  demand 
for  some  reduction  of  the  tariff,  to  which  they  owed  much  of  their 
power  of  oppression;  (3)  the  tendency  towards  the  fusion  of  groups 
of  cartels  concerned  with  successive  stages  of  the  same  industrial 
process  into  a  single  cartel;  and  (4)  the  growth  of  giant  ("mixed") 
businesses  somewhat  of  the  nature  of  American  trusts.  It  may  even 
be  plausibly  argued  that  just  at  present  the  growing  strength  of 
trusts  and  cartels  is  hostile  to  the  more  extreme  developments  of 
dumping.  But  the  near  future  may  differ  from  the  present  as  much 
as  that  differs  from  the  near  past.] 

78.  The  statement  that  a  trust  or  cartel  can  more  easily  sell 
surplus  goods  in  England  than  in  any  other  market  in  which  it 
habitually  sells  seems  only  in  part  true.  It  may  be  conceded  that  if 
the  tax  remains  fixed  in  amount,  then  a  given  fall  in  the  price  of 
the  goods  in  bond  will  make  a  less  proportionate  fall  in  their  price 
duty  paid  than  it  would  in  their  price  where  there  was  no  duty,  and, 
therefore,  might  not  stimulate  sales  so  much.  But  this  is  a  rela- 
tively small  point,  and  there  seems  to  be  no  other  difference  between 
the  two  cases.  [This  argument  would  of  course  be  inverted  if  the 
practice  were  to  lower  the  tax  on  dumped  goods  in  proportion  to 
the  special  reduction  of  price  made  for  the  occasion.  If  that  prac- 
tice prevailed,  it  would  render  dumping  slightly  easier  into  protected 
markets  in  which  it  habitually  sells,  than  into  free  markets.] 

79.  Dumping  into  the  English  market  is  annoying  to  some  English 
manufacturers,  while  benefiting  others  in  a  greater  or  less  degree. 
But  it  is  hard  to  devise  a  remedy  that  will  not  be  worse  than  the 
disease.  It  is  not  possible  to  prohibit  all  selling  below  the  full  normal 
price ;  it  is  not  easy  to  say  when  such  a  lowering  of  the  price  is  repre- 
hensible, .still   les5  when   it   is   an   offence.    English   manufacturers. 


ON  FISCAL  POLICY  449 

especially  in  the  iron  industry,  were  for  more  than  half  a  century  by 
far  the  chief  ill-doers  in  this  direction,  and  the  memory  of  their  ill- 
deeds  rankles  sorely  in  American  minds.  Even  now  the  accusations 
levied  against  some  combinations  of  English  shipping  companies, 
not  without  indirect  Government  subsidies,  are  very  bitter.  And  it 
might  be  hard  to  take  formal  action  against  foreigners,  who  were 
selling  cheaply  in  English  markets,  without  laying  ourselves  open  to 
very  sharp  retorts,  and  even  retaliations, 

0.    POSSIBILITIES  OF  CLOSER  RELATIONS  BETWEEN 
ENGLAND  AND  HER  DEPENDENCIES 

80.  It  has  already  been  suggested  that  the  import  taxes  levied  by 
other  countries,  whether  in  the  Old  World  or  the  New,  do  not  at  pres- 
ent press  on  British  industries  with  nearly  as  heavy  a  weight  as 
would  appear  at  first  sight ;  but  that  heavy  import  taxes  levied  in 
the  New  World  may  press  with  almost  unbearable  weight  on  later 
generations  of  English  people  (see  under  head  K).  W'e  of  the  pres- 
ent generation  have  a  high  duty  to  our  brethren  in  the  Colonies : 
we  have  an  even  higher  duty  to  our  descendants.  We  are  exhaust- 
ing the  coal,  without  which  it  will  be  difficult  for  Englishmen  to  offer 
manufactures  to  new  countries  on  terms  that  will  enable  them  to  be 
well  marketed,  even  if  no  import  duty  is  levied  upon  them.  And  we 
are  not  steadily  diminishing  that  great  National  Debt,  which  the 
forefathers  of  ourselves  and  our  brethren  in  the  Colonies  incurred 
to  secure  freedom  of  the  pathways  of  the  seas  for  British  traffic — 
a  freedom,  without  which  we  and  they  might  have  been  continental- 
ised  by  force.  A  part  of  the  descendants  of  those  who  incurred  this 
debt  are  now  powerful  nations,  owning  some  of  the  largest  and  richest 
landed  properties  in  the  world.  But  they  have  contributed  nothing 
to  the  interest  of  that  debt ;  and  they  have  contributed  scarcely 
anything  to  the  great  naval  expenditure  that  has  kept  the  paths  of 
the  seas  safe  for  British  traffic  during  the  century,  in  which  that 
debt  has  remained  nearly  stationary. 

England  is  still  richer  than  her  Colonies.  She  has,  indeed,  a  larger 
proportion  of  very  poor  people  than  they  have ;  but  she  is  able,  if 
she  wills  it,  to  raise  them  out  of  extreme  poverty  without  external 
help ;  and  her  people  for  the  next  generation  or  two  will  need  no 


450  MARSHALL 

aid.  A  century  hence,  however,  the  tale  may  be  different ;  two 
centuries  hence  it  almost  certainly  will.  And  a  century  is  but  a 
short  time  in  the  life  of  a  nation. 

Capital  is  abundant  in  England ;  and  she  has  few  openings  in 
which  it  can  be  made  to  yield  a  high  return.  Her  Colonies  are 
thirsty  for  capital :  and  they  have  vast  openings  in  which  it  can  be 
made  to  yield  a  very  high  return.  It  is  then  perhaps  reasonable  that 
she  should  continue  to  defend  their  coasts  with  but  little  aid  from 
them,  while  great  wealth  is  flowing  into  them,  earned  partly  by  the 
expenditure  which  has  created  her  debt ;  but  she  may  fairly  expect 
some  response  to  her  generosity. 

8i.  It  has  often  been  remarked  that  the  memory  of  the  sacrifices 
which  parents  have  made  for  their  children  when  young,  is  more 
nearly  certain  to  impel  them  to  make  further  sacrifices  when  the 
children  have  grown  up,  than  it  is  to  impel  the  children  when  strong 
to  make  sacrifices  for  their  parents  in  the  weakness  of  old  age :  and 
that  what  is  true  of  individuals,  is  true  also  of  nations.  England 
indeed  was  at  one  time  harsh  to  the  first-born  of  her  great  Colonies : 
but  that  was  in  accordance  with  principles  of  Mercantilism ;  which 
was  then  already  degenerate,  though  its  faults  were  unperceived  by 
the  Daughter  as  well  as  by  the  Mother :  and  a  better  spirit  has 
gradually  prevailed. 

England  has  never  been  harsh  to  any  of  her  younger  Daughters. 
In  recent  decades  she  has  been  increasingly  generous  to  them ;  and 
they  in  return,  under  the  influence  of  the  same  warmer  and  more 
generous  temper,  are  showing  a  livelier  gratitude  and  affection  for 
her.  If  this  gratitude  and  affection  are  deep-seated ;  and  if  the 
Colonies  recognise  the  great  responsibility  to  future  generations  of 
her  people  which  England  has  incurred  by  depleting  her  coal  mines, 
while  not  reducing  her  debt :  then  it  will  be  open  to  them  to  give 
an  assurance  that  they  will  requite  to  her  people  in  later  generations 
those  services  which  she  has  fully  rendered  to  their  peoples  in  earlier 
generations ;  and  which  she  is  rendering  to  them  increasingly  in  the 
present  generation,  when  the  powerful  battleships  of  several  restless 
nations  are  to  be  seen  in  the  Pacific  and  the  Atlantic  Oceans. 
*********** 

82.  Among  the  many  changes  of  the  last  60  years,  few  have  been 
more  clearly  marked  than  the  advantages  which  the  Revenue  officer 


ON  FISCAL  POLICY  451 

has  obtained  in  his  struggle  against  the  smuggler.  He  has  gained 
by  general  improvements  in  morale  and  education  ;  by  more  scientific 
and  thorough  departmental  organisation ;  by  submarine  and  other 
telegraphs ;  and  above  all  by  the  compression  of  nearly  all  bond 
fide  international  trade  within  the  limits  of  a  few  great  ports  and  a 
few  railway  stations.  It  may  therefore  be  expected  that  Preferential 
Duties  within  the  Empire  could  now  be  worked  with  less  than  a 
quarter  of  the  abuses  which  would  have  arisen  if  an  equally  large 
and  complex  trade  had  been  subject  to  them,  while  the  Revenue  officer 
had  no  greater  resources  at  his  command  than  he  had  early  in  last 
century.  But  the  abuses  which  caused  the  abandonment  of  differ- 
ential duties  by  England  were  so  great,  and  infused  so  much  moral 
poison  into  many  branches  of  business,  that  abuses  much  less  than 
they  might  yet  count  for  a  good  deal  in  the  balance  between  our 
present  system  and  one  which  proposes  to  cement  the  Empire  by 
such  means.  So  far  as  these  difficulties  are  concerned  the  positions 
of  England  and  her  Colonies  seem  to  be  similar. 

But  in  regard  to  the  main  issue  their  positions  are  far  apart.  Pro- 
tective policies  come  naturally  if  not  necessarily  to  young  countries, 
which  believe  that  many  of  their  young  industries  may  have  a  great 
future,  if  protected  from  the  competition  of  powerful  rivals  in  older 
countries,  where  capital  is  abundant  and  industrial  organisation  is 
highly  developed.  There  may  be — and  in  my  opinion  there  are — 
better  methods  of  bringing  public  funds  to  the  aid  of  those  who  are 
starting  new  industrial  ventures,  the  chief  fruits  of  which  are  likely 
to  be  reaped  in  a  later  generation  and  by  people  who  have  not  borne 
the  main  strains  and  risks  of  pioneer  work.  But  a  protective  tariff 
is  the  path  of  least  resistance  to  this  end.  It  is  that  which  is  in  fact 
being  universally  trodden ;  and  a  new  movement  which  tempts  the 
Colonies  to  move  a  little  further  on  this  path,  whether  wise  or  not, 
cannot  be  a  great  disaster  to  them,  at  all  events  from  the  purely 
economic  point  of  view.  But  the  history  of  all  countries  and  all 
ages  is  repeating  itself  in  the  Colonies.  Even  honourable  men  there 
are  being  drawn  into  slippery  paths.  They  advocate  preferential 
arrangements  effected  by  raising  the  tariff  against  foreign  goods 
without  lowering  it  in  favour  of  British  goods ;  and  they  put  into  the 
forefront  their  zeal  for  the  high  ideal  of  Imperial  unity.  They  look 
as  little  as  possible  at  the  private  gain  which  may  accrue  to  them 


452  MARSHALL 

from   the  particular  method  of  promoting  that  ideal  which   they 
advocate. 

England,  on  the  other  hand,  is  the  oldest  of  all  industrial  countries. 
She  has  no  industries  which  need  protection  on  the  ground  of  youth. 
But  she  has  a  few  which  have  needed  a  stimulus  because  they  have 
been  sleepy.  Under  the  stimulus  given  to  them  by  the  sale  of  high- 
class  imported  products  in  their  own  market,  the  greater  part  of 
these  few  have  been  markedly  aroused  during  the  last  few  years; 
and  she  might  indeed  have  been  seven  hundred  million  pounds  the 
poorer  if  that  stimulus  had  been  shut  out  by  a  tariff.  Her  industries 
do  not  need  defence  against  the  cheaper  capital  of  any  other  country. 
For  good  and  for  evil — in  my  opinion  for  good  on  the  balance — 
she  has  indeed  abstained  from  as  rapid  a  concentration  of  this 
capital  into  such  huge  masses  as  has  prevailed  in  America,  and  even 
in  Germany ;  but  if  she  thought  such  concentration  good,  she  could 
effect  it  more  quickly  than  any  other  country  except  the  United 
States,  and  perhaps  more  solidly  than  any  other.  In  her  case,  there- 
fore, import  duties,  levied  otherwise  than  with  a  direct  view  to  rev- 
enue, seem  to  me  to  have  no  economic  justification.  They  cannot, 
I  have  argued,  cause  foreigners  to  contribute  appreciably  to  her 
public  burdens.  Though  they  may  cause  new  employment  to  appear 
in  certain  directions,  they  will  necessarily  lessen  the  National  Divi- 
dend ;  and  therefore  they  will  necessarily  lessen  the  amount  of 
employment  at  good  wages. 

I  believe  that  they  have  this  effect  in  every  old  country,  but  that 
there  is  none  other  to  which  they  could  do  injury  at  all  comparable  to 
that  which  they  would  do  to  England.  She  still  has  advantages  in 
competition  with  other  advanced  countries  due  to  her  cheap  capital ; 
to  her  cheap  coal ;  and  to  her  climate,  which  is  conducive  to  steady 
work,  and  is  specially  favourable  to  the  finer  cotton  industries.  But 
her  chief  remaining  advantage  lies  in  that  unapproached  freedom 
of  movement,  that  viability  that  gives  her  much  of  the  strength, 
without  the  cumbrousness  and  want  of  elasticity,  of  a  single  huge 
firm  extending  over  the  whole  land.  In  the  phase  which  the  twentieth 
century  seems  to  be  opening  out  for  her,  viability  for  all  things 
great  and  small,  that  may  be  needed  directly  or  indirectly  for  the 
production  of  fine  and  complex  goods,  is  essential  to  her.  Unless 
she  can  produce  these  with  less  labour  than  any  other  country  can, 


ON  FISCAL  POLICY  453 

it  is  in  my  opinion  impossible  that  she  can  continue  to  pay,  as  she 
does  at  present,  higher  rates  of  real  wages  than  prevail  in  any  other 
old  country  for  almost  every  kind  of  labour :  the  real  wages  of  her 
people  must  fall  to  the  German  level.  They  might  even  fall  below 
that ;  for  Germany  has  advantages  of  her  own.  Railways  are  in- 
creasing the  economic  advantages  of  her  situation  in  the  centre  of 
Europe  very  fast.  Her  people  had  learnt  to  use  their  low  wages  and 
professional  incomes  thriftily  and  wisely,  before  they  came  under 
the  temptation  to  imitate  English  carelessness  in  domestic  economy ; 
and  in  this  matter  as  well  as  in  the  technical  economies  of  business, 
they  have  attained  a  high  scientific  perfection  from  which  English 
men  and  women  are  yet  far. 

The  suggestion,  then,  that  England  should  abandon  that  viability, 
which  is  her  chief  source  of  strength  in  comparison  with  competitors 
in  the  Old  and  the  New  World,  seems  to  me  a  radically  bad  way 
towards  attaining  a  good  end.  In  particular  there  is  danger  in  the 
fact  that  in  these  schemes  the  gain  which  either  side  is  invited  to 
expect  is  greater  than  the  loss  which  she  is  to  incur ;  and  yet,  as  the 
scheme  includes  differential  duties  which  are  essentially  wasteful,  the 
aggregate  material  gain  must  in  my  belief  be  less  than  the  aggregate 
material  loss.  The  schemes  would  be  less  dangerous  if  they  started 
with  the  frank  statement:  ''Imperial  unity  is  an  ideal  worth  much 
material  loss ;  let  us  consider  how  best  to  share  this  loss  among 
us."  As  it  is,  the  schemes  appear  to  me  likely  to  breed  more  of 
disappointment  and  friction  between  England  and  her  Colonies  than 
of  goodwill  and  the  true  spirit  of  Imperial  unity.  And,  if  approached 
in  a  spirit  of  greed,  rather  than  of  self-sacrifice,  they  are  likely  to 
rouse  animosity  in  other  lands,  and  to  postpone  the  day  at  which  it 
may  be  possible  to  work  towards  a  federated  Anglo-Saxondom, 
which  seems  to  be  an  even  higher  ideal  than  Imperial  unity. 


PART  III 

THE  PROTECTIVE  CONTROVERSY  IN  THE 
UNITED  STATES 

XVII 

HAMILTON:   REPORT  ON  MANUFACTURES^ 

*********** 

IT  IS  now  proper  to  proceed  a  step  further,-  and  to  enumerate 
the  principal  circumstances  from  which  it  may  be  inferred  that 
manufacturing  establishments  not  only  occasion  a  positive  augmen- 
tation of  the  produce  and  revenue  of  the  society,  but  that  they  con- 
tribute essentially  to  rendering  them  greater  than  they  could  possibly 
be  without  such  establishments.    These  circumstances  are: — 

1.  The  division  of  labor. 

2.  An  extension  of  the  use  of  machinery. 

3.  Additional  employment  to  classes  of  the  community  not  ordi- 
narily engaged  in  the  business. 

4.  The  promoting  of  emigration  from  foreign  countries. 

5.  The  furnishing  greater  scope  for  the  diversity  of  talents  and 
dispositions  which  discriminate  men  from  each  other. 

6.  The  affording  a  more  ample  and  various  field  for  enterprise. 

7.  The  creating  in  some  instances  a  new,  and  securing  in  all  a 
more  certain  and  steady  demand  for  the  surplus  produce  of  the  soil. 

Each  of  these  circumstances  has  a  considerable  influence  upon 
the  total  mass  of  industrious  effort  in  a  community ;  together  they 
add  to  it  a  degree  of  energy  and  effect  which  are  not  easily  con- 
ceived. Some  comments  upon  each  of  them,  in  the  order  in  which 
they  have  been  stated,  may  serve  to  explain  their  importance. 

1  Alexander  Hamilton  (1757-1804),  Report  on  Manufactures  (1791)-  This 
was  a  report  to  Congress  by  Hamilton  as  Secretary  of  the  Treasury,  in  response 
to  a  resolution  passed  in  the  House  in  January,  1790. 

2 The  preceding  sections  contain  a  refutation  of  the  Physiocratic  doctrine  con- 
cerning the  superior  productivity  of  agriculture.    (Ed.) 

454 


REPORT  ON  MANUFACTURES  455 

I.  As  to  the  division  of  labor. 

It  has  justly  been  observed,  that  there  is  scarcely  anything  of 
greater  moment  in  the  economy  of  a  nation  than  the  proper  division 
of  labor.  The  separation  of  occupations  causes  each  to  be  carried  to 
a  much  greater  perfection  than  it  could  possibly  acquire  if  they  were 
blended.    This  arises  principally  from  three  circumstances. 

I  St.  The  greater  skill  and  dexterity  naturally  resulting  from  a 
constant  and  undivided  application  to  a  single  object.  It  is  evident 
that  these  properties  must  increase  in  proportion  to  the  separation 
and  simplification  of  objects,  and  the  steadiness  of  the  attention 
devoted  to  each,  and  must  be  less  in  proportion  to  the  complica- 
tion of  objects  and  the  number  among  which  the  attention  is 
distracted. 

2d.  The  economy  of  time,  by  avoiding  the  loss  of  it,  incident  to  a 
frequent  transition  from  one  operation  to  another  of  a  different 
nature.  This  depends  on  various  circumstances, —  the  transition 
itself,  the  orderly  disposition  of  the  implements,  machines,  and 
materials  employed  in  the  operation  to  be  relinquished,  the  prepar- 
atory steps  to  the  commencement  of  a  new  one,  the  interruption  of 
the  impulse  which  the  mind  of  the  workman  acquires  from  being 
engaged  in  a  particular  operation,  the  distractions,  hesitations,  and 
reluctances  which  attend  the  passage  from  one  kind  of  busi- 
ness to  another. 

3d.  An  extension  of  the  use  of  machinery.  A  man  occupied  on  a 
single  object  will  have  it  more  in  his  power,  and  will  be  more 
naturally  led  to  exert  his  imagination  in  devising  methods  to  facili- 
tate and  abridge  labor  than  if  he  were  perplexed  by  a  variety  of 
independent  and  dissimilar  operations.  Besides  this,  the  fabrication 
of  machines  in  numerous  instances  becoming  itself  a  distinct  trade, 
the  artist  who  follows  it  has  all  the  advantages  which  have  been 
enumerated  for  improvement  in  his  particular  art,  and,  in  both  ways, 
the  invention  and  application  of  "machinery  are  extended. 

And  from  these  causes  united,  the  mere  separation  of  the  occupa- 
tion of  the  cultivator  from  that  of  the  artificer  has  the  effect  of 
augmenting  the  productive  powers  of  labor,  and  with  them  the  total 
mass  of  the  produce  or  revenue  of  a  country.  In  this  single  view 
of  the  subject,  therefore,  the  utility  of  artificers  or  manufacturers 
towards  promoting  an  increase  of  productive  industry  is  apparent. 


456  HAMILTON 

2.  As  to  an  extension  of  the  use  oj  machinery,  a  point  which, 
though  partly  anticipatcc},  requires  to  be  placed  in  one  or  two 
additional  lights. 

The  employment  of  machinery  forms  an  item  of  great  importance 
in  the  general  mass  of  national  industry.  It  is  an  artificial  force 
brought  in  aid  of  the  natural  force  of  man,  and,  to  all  the  purposes 
of  labor,  is  an  increase  of  hands,  an  accession  of  strength,  unincum- 
bered, too,  by  the  expense  of  maintaining  the  laborer.  INIay  it  not, 
therefore,  be  fairly  inferred  that  those  occupations  which  give  great- 
est scope  to  the  use  of  this  auxiliary  contribute  most  to  the  general 
stock  of  industrious  effort,  and,  in  consequence,  to  the  general 
product  of  industry? 

It  shall  be  taken  for  granted,  and  the  truth  of  the  position  re- 
ferred to  observation,  that  manufacturing  pursuits  are  susceptible  in 
a  greater  degree  of  the  application  of  machinery  than  those  of  agri- 
culture. If  so,  all  the  difference  is  lost  to  a  community,  which, 
instead  of  manufacturing  for  itself,  procures  the  fabrics  requisite 
to  its  supply  from  other  countries.  The  substitution  of  foreign  for 
domestic  manufactures  is  a  transfer  to  foreign  nations  of  the  advan- 
tages accruing  from  the  employment  of  machinery  in  the  modes  in 
which  it  is  capable  of  being  employed  with  most  utility  and  to  the 
greatest  extent. 

The  cotton  mill,  invented  in  England  within  the  last  twenty  years, 
is  a  signal  illustration  of  the  general  proposition  which  has  been 
just  advanced.  In  consequence  of  it  all  the  different  processes  for 
spinning  cotton  are  performed  by  means  of  machines  which  are  put 
in  motion  by  water,  and  attended  chiefly  by  women  and  children, 
and  by  a  smaller  number  of  persons,  in  the  whole,  than  are  requisite 
in  the  ordinary  mode  of  spinning.  And  it  is  an  advantage  of  great 
moment  that  the  operations  of  this  mill  continue  with  convenience 
during  the  night  as  well  as  through  the  day.  The  prodigious  effect 
of  such  a  machine  is  easily  conceived.  To  this  invention  is  to  be 
attributed  essentially  the  immense  progress  which  has  been  so 
suddenly  made  in  Great  Britain  in  the  various  fabrics  of  cotton. 

3.  As  to  the  additional  employment  oj  classes  oj  the  community 
not  originally  engaged  in  the  particidar  business. 

This  is  not  among  the  least  valuable  of  the  means  by  which  manu- 
facturing institutions  contribute  to  augment  the  general  stock  of 


REPORT  ON  MANUFACTURES  457 

industry  and  production.  In  places  where  those  institutions  prevail, 
besides  the  persons  regularly  engaged  in  them,  they  afford  occasional 
and  extra  employment  to  industrious  individuals  and  families  who 
are  willing  to  devote  the  leisure  resulting  from  the  intermissions  of 
their  ordinary  pursuits  to  collateral  labors,  as  a  resource  for  multi- 
plying their  acquisitions  or  their  enjoyments.  The  husbandman 
himself  experiences  a  new  source  of  profit  and  support  from  the 
increased  industry  of  his  wife  and  daughters,  invited  and  stimulated 
by  the  demands  of  the  neighboring  manufactories. 

Beside  this  advantage  of  occasional  employment  to  classes  having 
different  occupations,  there  is  another  of  a  nature  allied  to  it,  and 
of  a  similar  tendency.  This  is  the  employment  of  persons  who  would 
otherwise  be  idle  (and  in  many  cases  a  burden  on  the  community), 
either  from  the  bias  of  temper,  habit,  infirmity  of  body,  or  some 
other  cause,  indisposing  or  disqualifying  them  for  the  toils  of  the 
country.  It  is  worthy  of  particular  remark  that,  in  general,  women 
and  children  are  rendered  more  useful,  and  the  latter  more  early 
useful,  by  manufacturing  establishments  than  they  would  otherwise 
be.  Of  the  number  of  persons  employed  in  the  cotton  manufactories 
of  Great  Britain,  it  is  computed  that  four  sevenths  nearly  are 
women  and  children, — of  whom  the  greatest  proportion  are  children, 
and  many  of  them  of  a  tender  age. 

And  thus  it  appears  to  be  one  of  the  attributes  of  manufactures, 
and  one  of  no  small  consequence,  to  give  occasion  to  the  exertion  of 
a  greater  quantity  of  industry,  even  by  the  same  number  of  persons, 
where  they  happen  to  prevail,  than  would  exist  if  there  were  no 
such  establishments. 

4.  As  to  the  promoting  of  emigration  from  foreign  countries. 

Men  reluctantly  quit  one  course  of  occupation  and  livelihood  for 
another,  unless  invited  to  it  by  very  apparent  and  proximate  advan- 
tages. Many  who  would  go  from  one  country  to  another,  if  they 
had  a  prospect  of  continuing  with  more  benefit  the  callings  to  which 
they  have  been  educated,  will  often  not  be  tempted  to  change  their 
situation  by  the  hope  of  doing  better  in  some  other  way.  Manufac- 
turers who,  listening  to  the  powerful  invitations  of  a  better  price  for 
their  fabrics  or  their  labor ;  of  greater  cheapness  of  provisions  and 
raw  materials ;  of  an  exemption  from  the  chief  part  of  the  taxes, 
burdens,  and  restraints  which  they  endure  in  the  Old  World ;   of 


458  HAMILTON 

greater  personal  independence  and  consequence  under  the  operation 
of  a  more  equal  government ;  and  of  what  is  far  more  precious  than 
mere  religious  toleration,  a  perfect  equality  of  religious  privileges, 
would  probably  flock  from  Europe  to  the  United  States  to  pursue 
their  own  trades  or  professions,  if  they  were  once  made  sensible  of 
the  advantages  they  would  enjoy,  and  were  inspired  with  an  assur- 
ance of  encouragement  and  employment,  will  with  difficulty  be 
induced  to  transplant  themselves  with  a  view  to  becoming  cultivators 
of  land. 

If  it  be  true,  then,  that  it  is  the  interest  of  the  United  States  to 
open  every  possible  avenue  to  emigration  from  abroad,  it  affords  a 
weighty  argument  for  the  encouragement  of  manufactures,  which, 
for  the  reasons  just  assigned,  will  have  the  strongest  tendency  to 
multiply  the  inducements  to  it. 

Here  is  perceived  an  important  resource,  not  only  for  extending 
the  population,  and  with  it  the  useful  and  productive  labor  of  the 
country,  but  likewise  for  the  prosecution  of  manufactures  without 
deducting  from  the  number  of  hands  which  might  otherwise  be 
drawn  to  tillage,  and  even  for  the  indemnification  of  agriculture  for 
such  as  might  happen  to  be  diverted  from  it.  Many,  whom  manu- 
facturing views  would  induce  to  emigrate,  would  afterwards  yield  to 
the  temptations  which  the  particular  situation  of  this  country  holds 
out  to  agricultural  pursuits.  And  while  agriculture  would  in  other 
respects  derive  many  signal  and  unmingled  advantages  from  the 
growth  of  manufactures,  it  is  a  problem  whether  it  would  gain  or 
lose  as  to  the  article  of  the  number  of  persons  employed  in  carry- 
ing it  on. 

5.  As  to  the  furnishing  greater  scope  for  the  diversity  of  talents 
and  dispositions  which  discriminate  men  from  each  other. 

This  is  a  much  more  powerful  mean  of  augmenting  the  fund  of 
national  industry  than  may  at  first  sight  appear.  It  is  a  just  observa- 
tion that  minds  of  the  strongest  and  most  active  powers  for  their 
proper  objects  fall  below  mediocrity,  and  labor  without  effect  if 
confined  to  uncongenial  pursuits.  And  it  is  thence  to  be  inferred 
that  the  results  of  human  exertion  may  be  immensely  increased  by 
diversifying  its  objects.  When  all  the  different  kinds  of  industry 
obtain  in  a  community,  each  individual  can  find  his  proper  element, 
and  can  call  into  activity  the  whole  vigor  of  his  nature.    And  the 


REPORT  ON  MANUFACTURES  459 

community  is  benefited  by  the  services  of  its  respective  members 
in  the  manner  in  which  each  can  serve  it  with  most  effect. 

If  there  be  anything  in  a  remark  often  to  be  met  with,  namely, 
that  there  is  in  the  genius  of  the  people  of  this  country  a  peculiar 
aptitude  for  mechanic  improvements,  it  would  operate  as  a  forcible 
reason  for  giving  opportunities  to  the  exercise  of  that  species  of 
talent  by  the  propagation  of  manufactures. 

6.  As  to  the  awarding  .  a  more  ample  and  various  field  jar 
enterprise. 

This  also  is  of  greater  consequence  in  the  general  scale  of  national 
exertion  than  might  perhaps,  on  a  superficial  view,  be  supposed, 
and  has  effects  not  altogether  dissimilar  from  those  of  the  circum- 
stance last  noticed.  To  cherish  and  stimulate  the  activity  of  the 
human  mind  by  multiplying  the  objects. of  enterprise  is  not  among 
the  least  considerable  of  the  expedients  by  which  the  wealth  of  a 
nation  may  be  promoted.  Even  things  in  themselves  not  positively 
advantageous  sometimes  become  so  by  their  tendency  to  provoke 
exertion.  Every  new"  scene  which  is  opened  to  the  busy  nature  of 
man  to  rouse  and  exert  itself  is  the  addition  of  a  new  energy  to  the 
general  stock  of  effort. 

The  spirit  of  enterprise,  useful  and  prolific  as  it  is,  must  neces- 
sarily be  contracted  or  expanded  in  proportion  to  the  simplicity  or 
variety  of  the  occupations  and  productions  which  are  to  be  found 
in  a  society.  It  must  be  less  in  a  nation  of  mere  cultivators  than  in 
a  nation  of  cultivators  and  merchants,  less  in  a  nation  of  cultiva- 
tors and  merchants  than  in  a  nation  of  cultivators,  artificers,  and 
merchants. 

7.  As  to  the  creating,  in  some  instances,  a  new,  and  securing  in 
all  a  more  certain  and  steady^  demand  for  the  surplus  produce,  of 
the  soil. 

This  is  among  the  most  important  of  the  circumstances  which 
have  been  indicated.  It  is  a  principal  mean  by  which  the  establish- 
ment of  manufactures  contributes  to  an  augmentation  of  the  produce 
or  revenue  of  a  country,  and  has  an  immediate  and  direct  relation 
to  the  prosperity  of  agriculture. 

It  is  evident  that  the  exertions  of  the  husbandman  will  be  steady 
or  fluctuating,  vigorous  or  feeble,  in  proportion  to  the  steadiness  or 
fluctuation,  adequateness  or  inadequateness,  of  the  markets  on  which 


46o  HAMILTON 

he  must  depend  for  the  vent  of  the  surplus  which  may  be  produced 
by  his  labor ;  and  that  such  surplus,  in  the  ordinary  course  of  things, 
will  be  greater  or  less  in  the  same  proportion. 

For  the  purpose  of  this  vent,  a  domestic  market  is  greatly  to  be 
preferred  to  a  foreign  one,  because  it  is,  in  the  nature  of  things,  far 
more  to  be  relied  upon. 

It  is  a  primary  object  of  the  policy  of  nations  to  be  able  to  supply 
themselves  with  subsistence  from  their  own  soils ;  and  manufactur- 
ing nations,  as  far  as  circumstances  permit,  endeavor  to  procure  from 
the  same  source  the  raw  materials  necessary  for  their  own  fabrics. 
This  disposition,  urged  by  the  spirit  of  monopoly,  is  sometimes  even 
carried  to  an  injudicious  extreme.  It  seems  not  always  to  be  recol- 
lected that  nations  who  have  neither  mines  nor  manufactures  can 
only  obtain  the  manufactured  articles  of  which  they  stand  in  need 
by  an  exchange  of  the  products  of  their  soils ;  and  that  if  those 
who  can  best  furnish  them  with  such  articles  are  unwilling  to  give 
a  due  course  to  this  exchange,  they  must  of  necessity  make  every 
possible  effort  to  manufacture  for  themselves ;  the  effect  of  which  is, 
that  the  manufacturing  nations  abridge  the  natural  advantages  of 
their  situation  through  an  unwillingness  to  permit  the  agricultural 
countries  to  enjoy  the  advantages  of  theirs,  and  sacrifice  the  interests 
of  a  mutually  beneficial  intercourse  to  the  vain  project  of  selling 
everything  and  buying  nothing. 

But  it  is  also  a  consequence  of  the  policy  which  has  been  noted, 
that  the  foreign  demand  for  the  products  of  agricultural  countries 
is  in  a  great  degree  rather  casual  and  occasional  than  certain  or 
constant.  To  what  extent  injurious  interruptions  of  the  demand  for 
some  of  the  staple  commodities  of  the  United  States  may  have  been 
experienced  from  that  cause  must  be  referred  to  the  judgment  of 
those  who  are  engaged  in  carrying  on  the  commerce  of  the  country ; 
but  it  may  be  safely  affirmed  that  such  interruptions  are  at  times 
very  inconveniently  felt,  and  that  cases  not  unfrequently  occur  in 
which  markets  are  so  confined  and  restricted  as  to  render  the  demand 
very  unequal  to  the  supply. 

Independently,  likewise,  of  the  artificial  impediments  which  are 
created  by  the  policy  in  question,  there  are  natural  causes  tending 
to  render  the  external  demand  for  the  surplus  of  agricultural  nations 


REPORT  ON  MANUFACTURES  461 

a  precarious  reliance.  The  differences  of  seasons  in  the  countries 
which  are  the  consumers  make  immense  differences  in  the  produce 
of  their  own  soils  in  different  years,  and,  consequently,  in  the 
degrees  of  their  necessity  for  foreign  supply.  Plentiful  harvests 
with  them,  especially  if  similar  ones  occur  at  the  same  time  in  the 
countries  which  are  the  furnishers,  occasion  of  course  a  glut  in  the 
markets  of  the  latter. 

Considering  how  fast  and  how  much  the  progress  of  new  settlements 
in  the  United  States  must  increase  the  surplus  produce  of  the  soil, 
and  weighing  seriously  the  tendency  of  the  system  which  prevails 
among  most  of  the  commercial  nations  of  Europe,  whatever  depend- 
ence may  be  placed  on  the  force  of  natural  circumstances  to  counter- 
act the  effects  of  an  artificial  policy,  there  appear  strong  reasons  to 
regard  the  foreign  demand  for  that  surplus  as  too  uncertain  a  re- 
liance, and  to  desire  a  substitute  for  it  in  an  extensive  domes- 
tic market. 

To  secure  such  a  market  there  is  no  other  expedient  than  to  pro- 
mote manufacturing  establishments.  Manufacturers,  who  constitute 
the  most  numerous  class  after  the  cultivators  of  land,  are  for  that 
reason  the  principal  consumers  of  the  surplus  of  their  labor. 

This  idea  of  an  extensive  domestic  market  for  the  surplus  produce 
of  the  soil  is  of  the  first  consequence.  It  is,  of  all  things,  that 
which  most  effectually  conduces  to  a  flourishing  state  of  agriculture. 
If  the  effect  of  manufactories  should  be  to  detach  a  portion  of  the 
hands,  which  would  otherwise  be  engaged  in  tillage,  it  might  possibly 
cause  a  smaller  quantity  of  lands  to  be  under  cultivation ;  but  by 
their  tendency  to  procure  a  more  certain  demand  for  the  surplus 
produce  of  the  soil,  they  would  at  the  same  time  cause  the  lands 
which  were  in  cultivation  to  be  better  improved  and  more  productive. 
And  while,  by  their  influence,  the  condition  of  each  individual 
farmer  would  be  ameliorated,  the  total  mass  of  agricultural  produc- 
tion would  probably  be  increased.  For  this  must  evidently  depend 
as  much  upon  the  degree  of  improvement,  if  not  more,  than  upon 
the  number  of  acres  under  culture. 

It  merits  particular  observation  that  the  multiplication  of  manu- 
factories not  only  furnishes  a  market  for  those  articles  which  have 
been  accustomed  to  be  produced  in  abundance  in  a  country,  but  it 


462  HAMILTON 

likewise  creates  a  demand  for  such  as  were  either  unknown  or  pro- 
duced in  inconsiderable  quantities.  The  bowels  as  well  as  the 
surface  of  the  earth  are  ransacked  for  articles  which  were  before 
neglected.  Animals,  plants,  and  minerals  acquire  an  utility  and 
value  which  were  before  unexplored. 

The  foregoing  considerations  seem  sufficient  to  establish,  as  gen- 
eral propositions,  that  it  is  the  interest  of  nations  to  diversify  the 
industrious  pursuits  of  the  individuals  who  compose  them ;  that  the 
establishment  of  manufactures  is  calculated  not  only  to  increase 
the  general  stock  of  useful  and  productive  labor,  but  even  to  improve 
the  state  of  agriculture  in  particular ;  certainly  to  advance  the  in- 
terests of  those  who  are  engaged  in  it.  There  are  other  views  that 
will  be  hereafter  taken  of  the  subject  which,  it  is  conceived,  will 
serve  to  confirm  these  inferences. 

III.  Previously  to  a  further  discussion  of  the  objections  to  the 
encouragement  of  manufactures,  which  have  been  stated,  it  will  be 
of  use  to  see  what  can  be  said  in  reference  to  the  particular  situation 
of  the  United  States  against  the  conclusions  appearing  to  result  from 
what  has  been  already  offered. 

It  may  be  observed,  and  the  idea  is  of  no  inconsiderable  weight, 
that  however  true  it  might  be  that  a  state  which,  possessing  large 
tracts  of  vacant  and  fertile  territory,  was  at  the  same  time  secluded 
from  foreign  commerce,  would  find  its  interest  and  the  interest  of 
agriculture  in  diverting  a  part  of  its  population  from  tillage  to 
manufactures ;  yet  it  will  not  follow  that  the  same  is  true  of  a  state 
which,  having  such  vacant  and  fertile  territory,  has  at  the  same 
time  ample  opportunity  of  procuring  from  abroad,  on  good  terms, 
all  the  fabrics  of  which  it  stands  in  need  for  the  supply  of  its  inhab- 
itants. The  power  of  doing  this,  at  least,  secures  the  great  advan- 
tage of  a  division  of  labor,  leaving  the  farmer  free  to  pursue 
exclusively  the  culture  of  his  land,  and  enabling  him  to  procure  with 
its  products  the  manufactured  supplies  requisite  either  to  his  wants 
or  to  his  enjoyments.  And  though  it  should  be  true  that  in  settled 
countries  the  diversification  of  industry  is  conducive  to  an  increase 
in  the  productive  powers  of  labor,  and  to  an  augmentation  of 
revenue  and  capital,  yet  it  is  scarcely  conceivable  that  there  can  be 
anything  of  so  solid  and  permanent  advantage  to  an  uncultivated  and 


REPORT  ON  MANUFACTURES  46.3 

unpeopled  country  as  to  convert  its  wastes  into  cultivated  and 
inhabited  districts.  If  the  revenue,  in  the  mean  time,  should  be  less, 
the  capital  in  the  event  must  be  greater. 

To  these  observations  the  following  appears  to  be  a  satisfactory 
answer:  — 

I,  If  the  system  of  perfect  liberty  to  industry  and  commerce 
were  the  prevailing  system  of  nations,  the  arguments  which  dissuade 
a  country  in  the  predicament  of  the  United  States  from  the  zealous 
pursuit  of  manufactures  would,  doubtless,  have  great  force.  It  will 
not  be  affirmed  that  they  might  not  be  permitted,  with  few  excep- 
tions, to  serve  as  a  rule  of  national  conduct.  In  such  a  state  of  things 
each  country  would  have  the  full  benefit  of  its  peculiar  advantages 
to  compensate  for  its  deficiencies  or  disadvantages.  If  one  nation 
were  in  a  condition  to  supply  manufactured  articles  on  better  terms 
than  another,  that  other  might  find  an  abundant  indemnification  in 
a  superior  capacity  to  furnish  the  produce  of  the  soil.  And  a  free 
exchange,  mutually  beneficial,  of  the  commodities  which  each  was 
able  to  supply  on  the  best  terms  might  be  carried  on  between  them, 
supporting  in  full  vigor  the  industry  of  each.  And  though  the  cir- 
cumstances which  have  been  mentioned,  and  others  which  will  be 
unfolded  hereafter,  render  it  probable  that  nations  merely  agricul- 
tural would  not  enjoy  the  same  degree  of  opulence,  in  proportion  to 
their  numbers,  as  those  which  united  manufactures  with  agriculture ; 
yet  the  progressive  improvement  of  the  lands  of  the  former  might, 
in  the  end,  atone  for  an  inferior  degree  of  opulence  in  the  mean  time, 
and,  in  a  case  in  which  opposite  considerations  are  pretty  equally 
balanced,  the  option  ought  perhaps  always  to  be  in  favor  of  leaving 
industry  to  its  own  direction. 

But  the  system  which  has  been  mentioned  is  far  from  character- 
izing the  general  policy  of  nations.  The  prevalent  one  has  been 
regulated  by  an  opposite  spirit.  The  consequence  of  it  is  that  the 
United  States  are,  to  a  certain  extent,  in  the  situation  of  a  country 
precluded  from  foreign  commerce.  They  can  indeed,  without  diffi- 
culty, obtain  from  abroad  the  manufactured  supplies  of  which  they 
are  in  want,  but  they  experience  numerous  and  very  injurious  im- 
pediments to  the  emission  and  vent  of  their  own  commodities.  Nor 
is  this  the  case  in  reference  to  a  single  foreign  nation  only.    The 


464  HAMILTON 

regulations  of  several  countries,  with  which  we  have  the  most  exten- 
sive intercourse,  throw  serious  obstructions  in  the  way  of  the  principal 
staples  of  the  United  States. 

In  such  a  position  of  things  the  United  States  cannot  exchange 
with  Europe  on  equal  terms,  and  the  want  of  reciprocity  would  ren- 
der them  the  victim  of  a  system  which  should  induce  them  to  confine 
their  views  to  agriculture,  and  refrain  from  manufactures.  A  con- 
stant and  increasing  necessity,  on  their  part,  for  the  commodities  of 
Europe,  and  only  a  partial  and  occasional  demand  for  their  own  in 
return,  could  not  but  expose  them  to  a  state  of  impoverishment  com- 
pared with  the  opulence  to  which  their  political  and  natural  advan- 
tages authorize  them  to  aspire. 

Remarks  of  this  kind  are  not  made  in  the  spirit  of  complaint. 
It  is  for  the  nations,  whose  regulations  are  alluded  to,  to  judge  for 
themselves,  whether,  by  aiming  at  too  much,  they  do  not  lose  more 
than  they  gain.  It  is  for  the  United  States  to  consider  by  what 
means  they  can  render  themselves  least  dependent  on  the  combina- 
tions, right  or  wrong,  of  foreign  policy. 

It  is  no  small  consolation  that  already  the  measures  which  have 
embarrassed  our  trade  have  accelerated  internal  improvements,  which, 
upon  the  whole,  have  bettered  our  affairs.  To  diversify  and  extend 
these  improvements  is  the  surest  and  safest  method  of  indemni- 
fying ourselves  for  any  inconveniences  which  those  or  similar  meas- 
ures have  a  tendency  to  beget.  If  Europe  will  not  take  from  us  the 
products  of  our  soil  upon  terms  consistent  with  our  interest,  the 
natural  remedy  is  to  contract,  as  fast  as  possible,  our  wants  of  her. 

2.  The  conversion  of  their  waste  into  cultivated  lands  is  cer- 
tainly a  point  of  great  moment  in  the  political  calculations  of 
the  United  States.  But  the  degree  in  which  this  may  possibly 
be  retarded  by  the  encouragement  of  manufactories  does  not 
appear  to  countervail  the  powerful  inducements  to  affording  that 
encouragement. 

An  observation  made  in  another  place  is  of  a  nature  to  have  great 
influence  upon  this  question.  If  it  cannot  be  denied  that  the  inter- 
ests even  of  agriculture  may  be  advanced  more  by  having  such  of 
the  lands  of  a  State  as  are  occupied  under  good  cultivation  than  by 
having  a  greater  quantity  occupied  under  a  much  inferior  cultivation, 
and  if  manufactories,  for  the  reasons  assigned,  must  be  admitted  to 


REPORT  ON  MANUFACTURES  465 

have  a  tendency  to  promote  a  more  steady  and  vigorous  cultivation 
of  the  lands  occupied  than  would  happen  without  them,  it  will  follow 
that  they  are  capable  of  indemnifying  a  country  for  a  diminution 
of  the  progress  of  new  settlements,  and  may  serve  to  increase  both 
the  capital  value  and  the  income  of  its  lands,  even  though  they 
should  abridge  the  number  of  acres  under  tillage. 

But  it  does  by  no  means  follow  that  the  progress  of  new  settle- 
ments would  be  retarded  by  the  extension  of  manufactures.  The 
desire  of  being  an  independent  proprietor  of  land  is  founded  on 
such  strong  principles  in  the  human  breast,  that  where  the  oppor- 
tunity of  becoming  so  is  as  great  as  it  is  in  the  United  States,  the 
proportion  will  be  small  of  those  whose  situations  would  otherwise 
lead  to  it  who  would  be  diverted  from  it  towards  manufactures. 
And  it  is  highly  probable,  as  already  intimated,  that  the  accessions 
of  foreigners  who,  originally  drawn  over  by  manufacturing  views, 
would  afterwards  abandon  them  for  agricultural,  would  be  more  than 
an  equivalent  for  those  of  our  own  citizens  who  might  happen  to  be 
detached  from  them. 

The  remaining  objections  to  a  particular  encouragement  of  manu- 
factures in  the  United  States  now  require  to  be  examined. 

One  of  these  turns  on  the  proposition  that  industry,  if  left  to  itself, 
will  naturally  find  its  way  to  the  most  useful  and  profitable  employ- 
ment. Whence  it  is  inferred  that  manufactures,  without  the  aid 
of  government,  will  grow  up  as  soon  and  as  fast  as  the  natural  state 
of  things  and  the  interest  of  the  community  may  require. 

Against  the  solidity  of  this  hypothesis,  in  the  full  latitude  of  the 
terms,  very  cogent  reasons  may  be  offered.  These  have  relation  to 
the  strong  influence  of  habit,  and  the  spirit  of  imitation,  the  fear 
of  want  of  success  in  untried  enterprises,  the  intrinsic  difficulties 
incident  to  first  essays  towards  a  competition  with  those  who  have 
previously  attained  to  perfection  in  the  business  to  be  attempted ; 
the  bounties,  premiums,  and  other  artificial  encouragements  with 
which  foreign  nations  second  the  exertions  of  their  own  citizens  in 
the  branches  in  which  they  are  to  be  rivaled. 

Experience  teaches  that  men  are  often  so  much  governed  by 
what  they  are  accustomed  to  see  and  practice,  that  the  simplest  and 
most  obvious  improvements  in  the  most  ordinary  occupations  are 
adopted  with  hesitation,  reluctance,  and  by  slow  gradations.    The 


466  HAMILTON 

spontaneous  transition  to  new  pursuits  in  a  community  long  habit- 
uated to  different  ones  may  be  expected  to  be  attended  with  propor- 
tionably  greater  difficulty.  When  former  occupations  ceased  to  yield 
a  profit  adequate  to  the  subsistence  of  their  followers,  or  when 
there  was  an  absolute  deficiency  of  employment  in  them,  owing  to 
the  superabundance  of  hands,  changes  would  ensue;  but  these 
changes  would  be  likely  to  be  more  tardy  than  might  consist  with 
the  interest  either  of  individuals  or  of  the  society.  In  many  cases 
they  would  not  happen,  while  a  bare  support  could  be  insured  by 
an  adherence  to  ancient  courses,  though  a  resort  to  a  more  profitable 
employment  might  be  practicable.  To  produce  the  desirable  changes 
as  early  as  may  be  expedient  may,  therefore,  require  the  incitement 
and  patronage  of  government. 

The  apprehension  of  failing  in  new  attempts  is,  perhaps,  a  more 
serious  impediment.  There  are  dispositions  apt  to  be  attracted  by 
the  mere  novelty  of  an  undertaking,  but  these  are  not  always  those 
best  calculated  to  give  it  success.  To  this  it  is  of  importance  that 
the  confidence  of  cautious,  sagacious  capitalists,  both  citizens  and 
foreigners,  should  be  excited.  And  to  inspire  this  description  of 
persons  with  confidence,  it  is  essential  that  they  should  be  made  to 
see  in  any  project  which  is  new,  and  for  that  reason  alone,  if  for 
no  other,  precarious,  the  prospect  of  such  a  degree  of  countenance 
and  support  from  government  as  may  be  capable  of  overcoming  the 
obstacles  inseparable  from  first  experiments. 

The  superiority  antecedently  enjoyed  by  nations  who  have  pre- 
occupied and  perfected  a  branch  of  industry  constitutes  a  more 
formidable  obstacle  than  either  of  those  which  have  been  mentioned 
to  the  introduction  of  the  same  branch  into  a  country  in  which  it 
did  not  before  exist.  To  maintain  between  the  recent  establishments 
of  one  country  and  the  long  matured  establishments  of  another 
country  a  competition  upon  equal  terms,  both  as  to  quality  and 
price,  is  in  most  cases  impracticable.  The  disparity  in  the  one,  or  in 
the  other,  or  in  both,  must  necessarily  be  so  considerable  as  to  for- 
bid a  successful  rivalship  without  the  extraordinary  aid  and  protec- 
tion of  government. 

But  the  greatest  obstacle  of  all  to  the  successful  prosecution  of  a 
new  branch  of  industry,  in  a  country  in  which  it  was  before  unknown, 
consists,  as  far  as  the  instances  apply,  in  the  bounties,  premiums, 


REPORT  ON  MANUFACTURES  467 

and  other  aids  which  are  granted  in  a  variety  of  cases  by  the  nations 
in  which  the  establishments  to  be  imitated  are  previously  introduced. 
It  is  well  known — and  particular  examples  in  the  course  of  this 
report  will  be  cited — that  certain  nations  grant  bounties  on  the 
exportation  of  particular  commodities  to  enable  their  own  workmen 
to  undersell  and  supplant  all  competitors  in  the  countries  to  which 
those  commodities  are  sent.  Hence  the  undertakers  of  a  new  manu- 
facture have  to  contend  not  only  with  the  natural  disadvantages  of 
a  new  undertaking,  but  with  the  gratuities  and  remunerations  which 
other  governments  bestow.  To  be  enabled  to  contend  with  success, 
it  is  evident  that  the  interference  and  aid  of  their  own  governments 
are  indispensable. 

Combinations  by  those  engaged  in  a  particular  branch  of  business 
in  one  country  to  frustrate  the  first  efforts  to  introduce  it  into  another 
by  temporary  sacrifices,  recompensed,  perhaps,  by  extraordinary 
indemnifications  of  the  government  of  such  country,  are  believed  to 
have  existed,  and  are  not  to  be  regarded  as  destitute  of  probability. 
The  existence  or  assurance  of  aid  from  the  government  of  the  coun- 
try, in  which  the  business  is  to  be  introduced,  may  be  essential  to 
fortify  adventurers  against  the  dread  of  such  combinations, —  to 
defeat  their  effects,  if  formed,  and  to  prevent  their  being  formed  by 
demonstrating  that  they  must,  in  the  end,  prove  fruitless. 

Whatever  room  there  may  be  for  an  expectation  that  the  industry 
of  a  people,  under  the  direction  of  private  interest,  will  upon  equal 
terms  find  out  the  most  beneficial  employment  for  itself,  there  is 
none  for  a  reliance  that  it  will  struggle  against  the  force  of  unequal 
terms,  or  will  of  itself  surmount  all  the  adventitious  barriers  to  a 
successful  competition,  which  may  have  been  erected  either  by  the 
advantages  naturally  acquired  by  practice  and  previous  possession 
of  the  ground,  or  by  those  which  may  have  sprung  from  positive 
regulations  and  an  artificial  policy.  This  general  reflection  might 
alone  suffice  as  an  answer  to  the  objection  under  examination,  ex- 
clusively of  the  weighty  considerations  which  have  been  particu- 
larly urged. 

The  objections  to  the  pursuit  of  manufactures  in  the  United  States, 
which  next  present  themselves  to  discussion,  represent  an  impracti- 
cability of  success  arising  from  three  causes :  scarcity  of  hands, 
dearness  of  labor,  want  of  capital. 


468  HAMILTON 

The  two  first  circumstances  are  to  a  certain  extent  real,  and  within 
due  limits  ought  to  be  admitted  as  obstacles  to  the  success  of  manu- 
facturing enterprise  in  the  United  States.  But  there  are  various 
considerations  which  lessen  their  force,  and  tend  to  afford  an 
assurance  that  they  are  not  sufficient  to  prevent  the  advantageous 
prosecution  of  many  very  useful  and  extensive  manufactories. 

With  regard  to  scarcity  of  hands,  the  fact  itself  must  be  applied 
with  no  small  qualification  to  certain  parts  of  the  United  States. 
There  are  large  districts  which  may  be  considered  as  pretty  fully 
peopled,  and  which,  notwithstanding  a  continual  drain  for  distant 
settlement,  are  thickly  interspersed  with  flourishing  and  increasing 
towns.  If  these  districts  have  not  already  reached  the  point  at 
which  the  complaint  of  scarcity  of  hands  ceases,  they  are  not  remote 
from  it,  and  are  approaching  fast  towards  it.  And  having  perhaps 
fewer  attractions  to  agriculture  than  some  other  parts  of  the  Union, 
they  exhibit  a  proportionably  stronger  tendency  towards  other  kinds 
of  industry.  In  these  districts  may  be  discerned  no  inconsiderable 
maturity  for  manufacturing  establishments. 

But  there  are  circumstances  which  have  been  already  noticed  with 
another  view,  that  materially  diminish  everywhere  the  effect  of  a 
scarcity  of  hands.  These  circumstances  are :  the  great  use  which 
can  be  made  of  women  and  children,  on  which  point  a  very  pregnant 
and  instructive  fact  has  been  mentioned ;  the  vast  extension  given 
by  late  improvements  to  the  employment  of  machines,  which,  sub- 
stituting the  agency  of  fire  and  water,  has  prodigiously  lessened  the 
necessity  for  manual  labor ;  the  employment  of  persons  ordinarily 
engaged  in  other  occupations  during  the  seasons  or  hours  of  leisure, 
which,  besides  giving  occasion  to  the  exertion  of  a  greater  quantity 
of  labor  by  the  same  number  of  persons,  and  thereby  increasing  the 
general  stock  of  labor,  as  has  elsewhere  been  remarked,  may  also  be 
taken  into  the  calculation  as  a  resource  for  obviating  the  scarcity  of 
hands ;  lastly,  the  attraction  of  foreign  emigrants.  Whoever  in- 
spects with  a  careful  eye  the  composition  of  our  towns,  will  be  made 
sensible  to  what  an  extent  this  resource  may  be  relied  upon.  This 
exhibits  a  large  proportion  of  ingenious  and  valuable  workmen  in 
different  arts  and  trades,  who,  by  expatriating  from  Europe,  have 
improved  their  own  condition  and  added  to  the  industry  and  wealth 
of  the  United  States.    It  is  a  natural  inference  from  the  experience 


REPORT  ON  MANUFACTURES  469 

we  have  already  had,  that  as  soon  as  the  United  States  shall  present 
the  countenance  of  a  serious  prosecution  of  manufactures,  as  soon  as 
foreign  artists  shall  be  made  sensible  that  the  state  of  things  here 
affords  a  moral  certainty  of  employment  and  encouragement,  com- 
petent numbers  of  European  workmen  will  transplant  themselves 
effectually  to  insure  the  success  of  the  design.  How  indeed  can  it 
otherwise  happen,  considering  the  various  and  powerful  inducements 
which  the  situation  of  this  country  offers ;  addressing  themselves  to 
so  many  strong  passions  and  feelings,  to  so  many  general  and ' 
particular  interests? 

It  may  be  affirmed,  therefore,  in  respect  to  hands  for  carrying  on 
manufactures,  that  we  shall  in  a  great  measure  trade  upon  a  foreign 
stock,  reserving  our  own  for  the  cultivation  of  our  lands  and  the 
manning  of  our  ships,  as  far  as  character  and  circumstances  shall 
incline.  It  is  not  unworthy  of  remark,  that  the  objection  to  the 
success  of  manufactures  deduced  from  the  scarcity  of  hands,  is  alike 
applicable  to  trade  and  navigation,  and  yet  these  are  perceived  to 
flourish,  without  any  sensible  impediment  from  that  cause. 

As  to  the  dearness  of  labor  (another  of  the  obstacles  alleged), 
this  has  relation  principally  to  two  circumstances :  one,  that  which 
has  been  just  discussed,  or  the  scarcity  of  hands ;  the  other,  the 
greatness  of  profits. 

As  far  as  it  is  a  consequence  of  the  scarcity  of  hands,  it  is  miti- 
gated by  all  the  considerations  which  have  been  adduced  as  lessening 
that  deficiency.  It  is  certain,  too,  that  the  disparity  in  this  respect 
between  some  of  the  most  manufacturing  parts  of  Europe  and  a  large 
proportion  of  the  United  States  is  not  nearly  so  great  as  is  com- 
monly imagined.  It  is  also  much  less  in  regard  to  artificers  and  man- 
ufacturers than  in  regard  to  country  laborers ;  and  while  a  careful 
comparison  shows  that  there  is  in  this  particular  much  exaggeration, 
it  is  also  evident  that  the  effect  of  the  degree  of  disparity  which  does 
truly  exist  is  diminished  in  proportion  to  the  use  which  can  be  made 
of  machinery. 

To  illustrate  this  last  idea :  let  it  be  supposed  that  the  difference 
of  price  in  two  countries  of  a  given  quantity  of  manual  labor  requi- 
site to  the  fabrication  of  a  given  article  is  as  ten,  and  that  some 
MECHANIC  power  is  introduced  into  both  countries  which,  perform- 
ing half  the  necessary  labor,  leaves  only  half  to  be  done  by  hand, 


470  HAMILTON 

it  is  evident  that  the  difference  in  the  cost  of  the  fabrication  of  the 
article  in  question  in  the  two  countries,  as  far  as  it  is  connected  with 
the  price  of  labor,  will  be  reduced  from  ten  to  live  in  consequence  of 
the  introduction  of  that  power. 

This  circumstance  is  worthy  of  the  most  particular  attention.  It 
diminishes  immensely  one  of  the  objections  most  strenuously  urged 
against  the  success  of  manufactures  in  the  United  States. 

To  procure  all  such  machines  as  are  known  in  any  part  of  Europe 
can  only  require  a  proper  provision  and  due  pains.  The  knowledge 
of  several  of  the  most  important  of  them  is  already  possessed.  The 
preparation  of  them  here  is  in  most  cases  practicable  on  nearly 
equal  terms.  As  far  as  they  depend  on  water,  some  superiority  of 
advantages  may  be  claimed  from  the  uncommon  variety  and  greater 
cheapness  of  situations  adapted  to  mill-seats  with  which  different 
parts  of  the  United  States  abound. 

So  far  as  the  dearness  of  labor  may  be  a  consequence  of  the 
greatness  of  profits  in  any  branch  of  business,  it  is  no  obstacle  to 
its  success.  The  undertaker  can  afford  to  pay  the  price. 
I  There  are  grounds  to  conclude  that  undertakers  of  manufactures 
in  this  country  can  at  this  time  afford  to  pay  higher  wages  to  the 
workmen  they  may  employ  than  are  paid  to  similar  workmen  in 
Europe.  The  prices  of  foreign  fabrics  in  the  markets  of  the  United 
States,  which  will  for  a  long  time  regulate  the  prices  of  the  domestic 
ones;  may  be  considered  as  compounded  of  the  following  ingredients : 
The  first  cost  of  materials,  including  the  taxes,  if  any,  which  are 
paid  upon  them  where  they  are  made,  the  expense  of  grounds, 
buildings,  machinery  and  tools ;  the  wages  of  the  persons  employed 
in  the  manufactory ;  the  profits  on  the  capital  or  stock  employed ; 
the  commissions  of  agents  to  purchase  them  where  they  are  made ; 
the  expense  of  transportation  to  the  United  States,  including  insur- 
ance and  other  incidental  charges ;  the  taxes  or  duties,  if  any,  and 
fees  of  office  which  are  paid  on  their  exportation  ;  the  taxes  or  duties, 
and  fees  of  office  which  are  paid  on  their  importation. 

As  to  the  first  of  these  items,  the  cost  of  materials,  the  advantage 
upon  the  whole  is  at  present  on  the  side  of  the  United  States ;  and 
the  difference  in  their  favor  must  increase  in  proportion  as  a  certain 
and  extensive  domestic  demand  shall  induce  the  proprietors  of  land 
to  devote  more  of  their  attention  to  the  production  of  those  materials. 


REPORT  ON  iMANUFACTURES  471 

It  ought  not  to  escape  observation,  in  a  comparison  on  this  point, 
that  some  of  the  principal  manufacturing  countries  of  Europe  are 
much  more  dependent  on  foreign  supply  for  the  materials  of  their 
manufactures  than  would  be  the  United  States,  who  are  capable  of 
supplying  themselves  with  a  greater  abundance,  as  well  as  a  greater 
variety,  of  the  requisite  materials. 

As  to  the  second  item,  the  expense  of  grounds,  buildings,  machinery 
and  tools,  an  equality  at  least  may  be  assumed ;  since  advantages 
in  some  particulars  will  counterbalance  temporary  disadvantages  in 
others. 

As  to  the  third  item,  or  the  article  of  wages,  the  comparison 
certainly  turns  against  the  United  States,  though,  as  before  observed, 
not  in  so  great  a  degree  as  is  commonly  supposed. 

The  fourth  item  is  alike  applicable  to  the  foreign  and  to  the 
domestic  manufacture.  It  is  indeed  more  properly  a  result  than  a 
particular  to  be  compared. 

But  with  respect  to  all  the  remaining  items,  they  are  alone  appli- 
cable to  the  foreign  manufacture,  and  in  the  strictest  sense  extraor- 
dinaries;  constituting  a  sum  of  extra  charge  on  the  foreign  fabric, 
which  cannot  be  estimated  at  less  than  from  fifteen  to  thirty  per 
cent,  on  the  cost  of  it  at  the  manufactory. 

This  sum  of  extra  charge  may  confidently  be  regarded  as  more 
than  a  counterpoise  for  the  real  difference  in  the  price  of  labor; 
and  is  a  satisfactory  proof  that  manufactures  may  prosper  in  defi- 
ance of  it  in  the  United  States. 


* 


*  1 


In  order  to  a  better  judgment  of  the  means  proper  to  be  resorted 
to  by  the  United  States,  it  will  be  of  use  to  advert  to  those  which 
have  been  employed  with  success  in  other  countries.  The  principal 
of  these  are: — 

I.  Protecting  duties,  or  duties  on  those  foreign  articles  which  are 
the  rivals  of  the  domestic  ones  intended  to  be  encouraged. 

iln  the  omitted  portions  Hamilton  toolc  up  the  question  of  how  to  obtain 
necessary  capital  for  manufactures,  and  the  extent  to  which  they  had  already 
been  introduced.  He  also  discussed  their  effect  in  giving  the  country  a  better 
bargaining  power  in  international  trade  and  in  providing  Southern  agricul- 
turists with  a  market.  (Ed.) 


472  HAMILTON 

Duties  of  this  nature  evidently  amount  to  a  virtual  bounty  on 
the  domestic  fabrics,  since  by  enhancing  the  charges  on  foreign 
articles  they  enable  the  national  manufacturers  to  undersell  all  their 
foreign  competitors.  The  propriety  of  this  species  of  encouragement 
need  not  be  dwelt  upon,  as  it  is  not  only  a  clear  result  from  the 
numerous  topics  which  have  been  suggested,  but  is  sanctioned  by 
the  laws  of  the  United  States  in  a  variety  of  instances ;  it  has  the 
additional  recommendation  of  being  a  resource  of  revenue.  Indeed, 
all  the  duties  imposed  on  imported  articles,  though  with  an  exclusive 
view  to  revenue,  have  the  effect  in  contemplation ;  and,  except  where 
they  fall  on  raw  materials,  wear  a  beneficent  aspect  towards  the 
manufactures  of  the  country. 

2.  Prohibitions  of  rival  articles,  or  duties  equivalent  to  prohibitions. 
This  is  another  and  an  efficacious  mean  of  encouraging  national 

manufactures ;  but  in  general  it  is  only  fit  to  be  employed  when  a 
manufacture  has  made  such  a  progress,  and  is  in  so  many  hands, 
as  to  insure  a  due  competition  and  an  adequate  supply  on  reasonable 
terms.  Of  duties  equivalent  to  prohibitions  there  are  examples  in 
the  laws  of  the  United  States ;  and  there  are  other  cases  to  which 
the  principle  may  be  advantageously  extended,  but  they  are  not 
numerous. 

Considering  a  monopoly  of  the  domestic  market  to  its  own  manu- 
facturers as  the  reigning  policy  of  manufacturing  nations,  a  similar 
policy  on  the  part  of  the  United  States,  in  every  proper  instance, 
is  dictated,  it  might  almost  be  said,  by  the  principles  of  distribu- 
tive justice ;  certainly  by  the  duty  of  endeavoring  to  secure  to  their 
own  citizens  a  reciprocity  of  advantages. 

3.  Prohibitions  of  the  exportation  of  the  materials  of  manufactures. 
The  desire  of  securing  a  cheap  and  plentiful  supply  for  the  national 

workmen ;  and,  where  the  article  is  either  peculiar  to  the  country, 
or  of  peculiar  quality  there,  the  jealousy  of  enabling  foreign  work- 
men to  rival  those  of  the  nation  with  its  own  materials,  are  the 
leading  motives  to  this  species  of  regulation.  It  ought  not  to  be 
affirmed  that  it  is  in  no  instance  proper,  but  it  is  certainly  one  which 
ought  to  be  adopted  with  great  circumspection  and  only  in  very 
plain  cases.  It  is  seen  at  once  that  its  immediate  operation  is  to 
abridge  the  demand  and  keep  down  the  price  of  the  produce  of  some 
other  branch  of  industry,  generally  speaking  of  agriculture,  to  the 


REPORT  ON  MANUFACTURES  473 

prejudice  of  those  who  carry  it  on ;  and  though  if  it  be  really  essen- 
tial to  the  prosperity  of  any  very  important  national  manufacture 
it  may  happen  that  those  who  are  injured  in  the  first  instance  may 
be  eventually  indemnified  by  the  superior  steadiness  of  an  extensive 
domestic  market  depending  on  that  prosperity,  yet,  in  a  matter  in 
which  there  is  so  much  room  for  nice  and  difficult  combinations,  in 
which  such  opposite  considerations  combat  each  other,  prudence 
seems  to  dictate  that  the  expedient  in  question  ought  to  be  indulged 
with  a  sparing  hand. 

4.  Pecuniary  bounties. 

This  has  been  found  one  of  the  most  efficacious  means  of  encour- 
aging manufactures,  and  it  is,  in  some  views,  the  best,  though  it  has 
not  yet  been  practiced  upon  the  government  of  the  United  States, — 
unless  the  allowance  on  the  exportation  of  dried  and  pickled  fish  and 
salted  meat  could  be  considered  as  a  bounty, — and  though  it  is  less 
favored  by  public  opinion  than  some  other  modes.  Its  advantages 
are  these : — 

1.  It  is  a  species  of  encouragement  more  positive  and  direct  than 
any  other,  and  for  that  very  reason  has  a  more  immediate  tendency 
to  stimulate  and  uphold  new  enterprises,  increasing  the  chances  of 
profit,  and  diminishing  the  risks  of  loss  in  the  first  attempts. 

2.  It  avoids  the  inconvenience  of  a  temporary  augmentation  of 
price,  which  is  incident  to  some  other  modes,  or  it  produces  it  to  a 
less  degree,  either  by  making  no  addition  to  the  charges  on  the 
rival  foreign  article,  as  in  the  case  of  protecting  duties,  or  by  making 
a  smaller  addition.  The  first  happens  when  the  fund  for  the  bounty 
is  derived  from  a  different  object  (which  may  or  may  not  increase 
the  price  of  some  other  article  according  to  the  nature  of  that 
object);  the  second,  when  the  fund  is  derived  from  the  same  or  a 
similar  object  of  foreign  manufacture.  One  per  cent,  duty  on  the 
foreign  article,  converted  into  a  bounty  on  the  domestic,  will  have 
an  equal  effect  with  a  duty  of  2%  exclusive  of  such  bounty ;  and  the 
price  of  the  foreign  commodity  is  liable  to  be  raised  in  the  one  case 
in  the  proportion  of  I'^o,  in  the  other  in  that  of  29^.  Indeed,  the 
bounty,  when  drawn  from  another  source,  is  calculated  to  promote 
a  reduction  of  price,  because,  without  laying  any  new  charge  on  the 
foreign  article,  it  serves  to  introduce  a  competition  with  it,  and  to 
increase  the  total  quantity  of  the  article  in  the  market. 


474  HAMILTON 

3.  Bounties  have  not,  like  high  protecting  duties,  a  tendency  to 
produce  scarcity.  An  increase  of  price  is  not  always  the  immediate, 
though  where  the  progress  of  a  domestic  manufacture  does  not 
counteract  a  rise,  it  is  commonly  the  ultimate  effect  of  an  additional 
duty.  In  the  interval  between  the  laying  of  the  duty  and  a  propor- 
tional increase  of  price,  it  may  discourage  importation  by  interfering 
with  the  profits  to  be  expected  from  the  sale  of  the  article. 

4.  Bounties  are  sometimes  not  only  the  best,  but  the  only  proper 
expedient  for  uniting  the  encouragement  of  a  new  object  of  agricul- 
ture with  that  of  a  new  object  of  manufacture.  It  is  the  interest  of 
the  farmer  to  have  the  production  of  the  raw  material  promoted  by 
counteracting  the  interference  of  the  foreign  material  of  the  same 
kind.  It  is  the  interest  of  the  manufacturer  to  have  the  material 
abundant  and  cheap.  If,  prior  to  the  domestic  production  of  the 
material  in  sufficient  quantity  to  supply  the  manufacturer  on  good 
terms,  a  duty  be  laid  upon  the  importation  of  it  from  abroad,  with  a 
view  to  promote  the  raising  of  it  at  home,  the  interest  both  of  the 
farmer  and  manufacturer  will  be  disserved.  By  either  destroying  the 
requisite  supply,  or  raising  the  price  of  the  article  beyond  what  can 
be  afforded  to  be  given  for  it  by  the  conductor  of  an  infant  manu- 
facture, it  is  abandoned  or  fails ;  and  there  being  no  domestic  manu- 
factories to  create  a  demand  for  the  raw  material  which  is  raised 
by  the  farmer,  it  is  in  vain  that  the  competition  of  the  like  foreign 
article  may  have  been  destroyed. 

It  cannot  escape  notice  that  a  duty  upon  the  importation  of  an 
article  can  no  otherwise  aid  the  domestic  production  of  it  than  by 
giving  the  latter  greater  advantages  in  the  home  market.  It  can 
have  no  influence  upon  the  advantageous  sale  of  the  article  pro- 
duced in  foreign  ma^rkets,  no  tendency,  therefore,  to  promote  its 
exportation. 

The  true  way  to  conciliate  these  two  interests  is  to  lay  a  duty  on 
foreign  manufactures  of  the  material,  the  growth  of  which  is  desired 
to  be  encouraged,  and  to  apply  the  produce  of  that  duty  by  way  of 
bounty  either  upon  the  production  of  the  material  itself,  or  upon  its 
manufacture  at  home,  or  upon  both.  In  this  disposition  of  the  thing 
the  manufacturer  commences  his  enterprise  under  every  advantage 
which  is  attainable  as  to  quantity  or  price  of  the  raw  material.  And 
the  farmer,  if  the  bounty  be  immediately  to  him,  is  enabled  by  it  to 


REPORT  ON  MANUFACTURES  475 

enter  into  a  successful  competition  with  the  foreign  material.  If 
the  bounty  be  to  the  manufacturer  on  so  much  of  the  domestic 
material  as  he  consumes,  the  operation  is  nearly  the  same ;  he  has 
a  motive  of  interest  to  prefer  the  domestic  commodity,  if  of  equal 
quality,  even  at  a  higher  price  than  the  foreign,  so  long  as  the  differ- 
ence of  price  is  anything  short  of  the  bounty  which  is  allowed  upon 
the  article. 

Except  the  simple  and  ordinary  kinds  of  household  manufacture, 
or  those  for  which  there  are  very  commanding  local  advantages, 
pecuniary  bounties  are  in  most  cases  indispensable  to  the  introduc- 
tion of  a  new  branch.  A  stimulus  and  a  support,  not  less  powerful 
and  direct,  is,  generally  speaking,  essential  to  the  overcoming  of  the 
obstacles  which  arise  from  the  competitions  of  superior  skill  and 
maturity  elsewhere.  Bounties  are  especially  essential  in  regard  to 
articles  upon  which  those  foreigners,  who  have  been  accustomed  to 
supply  a  country,  are  in  the  practice  of  granting  them. 

The  continuance  of  bounties  on  manufactures  long  established 
must  almost  always  be  of  questionable  policy,  because  a  presumption 
would  arise  in  every  such  case  that  there  were  natural  and  inherent 
impediments  to  success.  But  in  new  undertakings  they  are  as  justi- 
fiable as  they  are  oftentimes  necessary. 

There  is  a  degree  of  prejudice  against  bounties,  from  an  ap- 
pearance of  giving  away  the  public  money  without  an  immediate 
consideration,  and  from  a  supposition  that  they  serve  to  enrich 
particular  classes  at  the  expense  of  the  community. 

But  neither  of  these  sources  of  dislike  will  bear  a  serious  examina- 
tion. There  is  no  purpose  to  which  public  money  can  be  more 
beneficially  applied  than  to  the  acquisition  of  a  new  and  useful 
branch  of  industry,  no  consideration  more  valuable  than  a  perma- 
nent addition  to  the  general  stock  of  productive  labor. 

As  to  the  second  source  of  objection,  it  equally  lies  against  other 
modes  of  encouragement,  which  are  admitted  to  be  eligible.  As 
often  as  a  duty  upon  a  foreign  article  makes  an  addition  to  its  price, 
it  causes  an  extra  expense  to  the  community  for  the  benefit  of  the 
domestic  manufacturer.  A  bounty  does  no  more.  But  it  is  the 
interest  of  the  society  in  each  case  to  submit  to  a  temporary  expense, 
which  is  more  than  compensated  by  an  increase  of  industry  and 
wealth,  by  an  augmentation  of  resources  and  independence,  and  by 


476  HAMILTON 

the  circumstance  of  eventual  cheapness,  which  has  been  noticed  in 
another  place. 

It  would  deserve  attention,  however,  in  the  employment  of  this 
species  of  encouragement  in  the  United  States,  as  a  reason  for 
moderating  the  degree  of  it  in  the  instances  in  which  it  might  be 
deemed  eligible,  that  the  great  distance  of  this  country  from  Europe 
imposes  very  heavy  charges  on  all  the  fabrics  which  are  brought 
from  thence,  amounting  from  15%  to  30%  on  their  value,  according 
to  their  bulk. 

*J^  ^  -41.  ^  ^  ^  ^  M,  A^  .it'       ^ 

■K-  TT  tI"  TT  -TT  ■TV'  -Jr  -7^  ^  ^      X 

5.  Premiums. 

These  are  of  a  nature  allied  to  bounties,  though  distinguishable 
from  them  in  some  important  features. 

Bounties  are  applicable  to  the  whole  quantity  of  an  article  pro- 
duced or  manufactured  or  exported,  and  involve  a  correspondent 
expense.  Premiums  serve  to  reward  some  particular  excellence  or 
superiority,  some  extraordinary  exertion  or  skill,  and  are  dispensed 
only  in  a  small  number  of  cases.  But  their  effect  is  to  stimulate 
general  effort ;  contrived  so  as  to  be  both  honorary  and  lucrative, 
they  address  themselves  to  different  passions,  touching  the  chords 
as  well  of  emulation  as  of  interest.  They  are,  accordingly,  a  very 
economical  mean  of  exciting  the  enterprise  of  a  whole  community. 

There  are  various  societies  in  different  countries,  whose  object 
is  the  dispensation  of  premiums  for  the  encouragement  of  agricul- 
ture, arts,  manufactures  and  commerce,  and  though  they  are  for  the 
most  part  voluntary  associations,  with  comparatively  slender  funds, 
their  utility  has  been  immense.  IVIuch  has  been  done  by  this  mean 
in  Great  Britain.  Scotland  in  particular  owes  materially  to  it  a 
prodigious  melioration  of  condition.  From  a  similar  establishment 
in  the  United  States,  supplied  and  supported  by  the  Government  of 
the  Union,  vast  benefits  might  reasonably  be  expected.  Some  further 
ideas  on  this  head  shall  accordingly  be  submitted  in  the  conclusion 
of  this  report. 

6.  The  exemption  of  the  materials  of  manufactures  from  duty. 
The  policy  of  that  exemption,  as  a  general  rule,  particularly  in 

reference  to  new  establishments,  is  obvious.    It  can  hardly  ever  be 
advisable  to  add  the  obstructions  of  fiscal  burdens  to  the  difficulties 

^Hcre  he  discussed  the  constitutionality  of  protection.  (Ed.) 


REPORT  ON  MANUFACTURES  477 

which  naturally  embarrass  a  new  manufacture ;  and  where  it  is 
matured,  and  in  condition  to  become  an  object  of  revenue,  it  is,  gen- 
erally speaking,  better  that  the  fabric,  than  the  material,  should  be 
the  subject  of  taxation.  Ideas  of  proportion  between  the  quantum 
of  the  tax  and  the  value  of  the  article  can  be  more  easily  adjusted  in 
the  former  than  in  the  latter  case.  An  argument  for  exemptions 
of  this  kind  in  the  United  States  is  to  be  derived  from  the  practice, 
as  far  as  their  necessities  have  permitted,  of  those  nations  whom 
we  are  to  meet  as  competitors  in  our  own  and  in  foreign  markets. 

There  are,  however,  exceptions  to  it,  of  which  some  examples  will 
be  given  under  the  next  head. 

The  laws  of  the  Union  afford  instances  of  the  observance  of  the 
policy  here  recommended,  but  it  will  probably  be  found  advisable  to 
extend  it  to  some  other  cases.  Of  a  nature  bearing  some  affinity  to 
that  policy  is  the  regulation  which  exempts  from  duty  the  tools  and 
implements,  as  well  as  the  books,  clothes  and  household  furniture, 
of  foreign  artists  who  come  to  reside  in  the  United  States ;  an  ad- 
vantage already  secured  to  them  by  the  laws  of  the  Union,  and  which 
it  is  in  every  view  proper  to  continue. 

7.  Drawbacks  of  the  duties  which  are  imposed  on  the  materials 
of  manufactures. 

It  has  already  been  observed  as  a  general  rule,  that  duties  on  those 
materials  ought,  with  certain  exceptions,  to  be  forborne.  Of  these 
exceptions,  three  cases  occur  which  may  serve  as  examples.  One, 
where  the  material  is  itself  an  object  of  general  or  extensive  con- 
sumption, and  a  fit  and  productive  source  of  revenue.  Another, 
where  a  manufacture  of  a  simpler  kind,  the  competition  of  which 
with  a  like  domestic  article  is  desired  to  be  restrained,  partakes  of 
the  nature  of  a  raw  material  from  being  capable  by  a  further  process 
to  be  converted  into  a  manufacture  of  a  different  kind,  the  intro- 
duction or  growth  of  which  is  desired  to  be  encouraged.  A  third, 
where  the  material  itself  is  the  production  of  the  country,  and  in 
sufficient  abundance  to  furnish  a  cheap  and  plentiful  supply  to  the 
national  manufacturers. 

Under  the  first  description  comes  the  article  of  molasses.  It  is 
not  only  a  fair  object  of  revenue,  but  being  a  sweet,  it  is  just  that 
the  consumers  of  it  should  pay  a  duty  as  well  as  the  consumers 
of  sugar. 


478  HAMILTON 

Cottons  and  linens  in  their  white  state  fall  under  the  second 
description.  A  duty  upon  such  as  are  imported  is  proper  to  promote 
the  domestic  manufacture  of  similar  articles  in  the  same  state ;  a 
drawback  of  that  duty  is  proper  to  encourage  the  printing  and 
staining  at  home  of  those  which  are  brought  from  abroad.  When  the 
first  of  these  manufactures  has  attained  sufficient  maturity  in  a 
country  to  furnish  a  full  supply  for  the  second,  the  utility  of  the 
drawback  ceases. 

The  article  of  hemp  either  now  does  or  may  be  expected  soon  to 
exemplify  the  third  case  in  the  United  States. 

Where  duties  on  the  materials  of  manufactures  are  not  laid  for 
the  purpose  of  preventing  a  competition  with  some  domestic  produc- 
tion, the  same  reasons  which  recommend,  as  a  general  rule,  the 
exemption  of  those  materials  from  duties,  would  recommend,  as  a 
like  general  rule,  the  allowance  of  drawbacks  in  favor  of  the  manu- 
facturer. Accordingly,  such  drawbacks  are  familiar  in  countries 
which  systematically  pursue  the  business  of  manufactures,  which 
furnishes  an  argument  for  the  observance  of  a  similar  policy  in  the 
United  States ;  and  the  idea  has  been  adopted  by  the  laws  of  the 
Union,  in  the  instances  of  salt  and  molasses.  It  is  believed  that  it 
will  be  found  advantageous  to  extend  it  to  some  other  articles. 

8.  The  encouragement  of  new  inventions  and  discoveries  at  home, 
and  of  the  introduction  into  the  United  States  of  such  as  may  have 
been  made  in  other  countries;  particidarly  those  which  relate  to 
machinery. 

This  is  among  the  most  useful  and  unexceptionable  of  the  aids 
which  can  be  given  to  manufactures.  The  usual  means  of  that 
encouragement  are  pecuniary  rewards,  and,  for  a  time,  exclusive 
privileges.  The  first  must  be  employed  according  to  the  occasion  and 
the  utility  of  the  invention  or  discovery.  For  the  last,  so  far  as 
respects  "authors  and  inventors,"  provision  has  been  made  by  law. 
But  it  is  desirable,  in  regard  to  improvements  and  secrets  of  extraor- 
dinary value,  to  be  able  to  extend  the  same  benefit  to  introducers 
as  well  as  authors  and  inventors ;  a  policy  which  has  been  practiced 
with  advantage  in  other  countries.  Here,  however,  as  in  some  other 
cases,  there  is  cause  to  regret  that  the  competency  of  the  authority 
of  the  national  Government  to  the  good  which  might  be  done,  is  not 
without  a  question.    Many  aids  might  be  given  to  industry,  many 


REPORT  ON  MANUFACTURES  479 

internal  improvements  of  primary  magnitude  might  be  promoted, 
by  an  authority  operating  throughout  the  Union,  which  cannot  be 
effected  as  well,  if  at  all,  by  an  authority  confined  within  the  limits 
of  a  single  State. 

But  if  the  Legislature  of  the  Union  cannot  do  all  the  good  that 
might  be  wished,  it  is  at  least  desirable  that  all  may  be  done  which 
is  practicable.  Means  for  promoting  the  introduction  of  foreign 
improvements,  though  less  efficaciously  than  might  be  accomplished 
with  more  adequate  authority,  will  form  a  part  of  the  plan  intended 
to  be  submitted  in  the  close  of  this  report. 

It  is  customary  with  manufacturing  nations  to  prohibit,  under 
severe  penalties,  the  exportation  of  implements  and  machines  which 
they  have  either  invented  or  improved.  There  are  already  objects 
for  a  similar  regulation  in  the  United  States,  and  others  may  be 
expected  to  occur  from  time  to  time.  The  adoption  of  it  seems  to  be 
dictated  by  the  principle  of  reciprocity.  Greater  liberality  in  such 
respects  might  better  comport  with  the  general  spirit  of  the  country ; 
but  a  selfish  and  exclusive  policy  in  other  quarters  will  not  always 
permit  the  free  indulgence  of  a  spirit  which  would  place  us  upon  an 
unequal  footing.  As  far  as  prohibitions  tend  to  prevent  foreign 
competitors  from  deriving  the  benefit  of  the  improvements  made  at 
home,  they  tend  to  increase  the  advantages  of  those  by  whom  they 
have  been  introduced,  and  operate  as  an  encouragement  to  exertion. 

*         *         *         *         *         *         *         *         *         *         *i 

iKere  followed  details  concerning  the  leading  industries  requiring  protection. 
(Ed.) 


XVIII 

GALLATIN:  FREE  TRADE  MEMORIAL^ 

To  the  Honorable  the  Senate  and  House  oj  Representatives  of  the 
United  States,  in  Congress  assembled: — 

The  memorial  of  the  committee  appointed  for  that  purpose  by  the 
"  Free  Trade  Convention,"  held  at  Philadelphia  in  September 
and  October,  1831, 

Respectfully  shows  : — 

That  a  convention  of  delegates  appointed  by  public  meetings  in 
various  States  of  the  Union,  for  the  purpose  of  cooperating,  by  con- 
stitutional and  legal  measures,  in  procuring  the  repeal  of  the  restric- 
tive system,  was  held  at  Philadelphia  on  the  30th  of  September, 
1 83 1,  and  continued  in  session  till  the  7th  October  ensuing; 
when  a  committee,  consisting  of  one  member  from  each  State  repre- 
sented in  the  convention,  was  appointed  for  the  purpose  of  preparing 
a  memorial  to  Congress,  setting  forth  the  evils  of  the  existing  tariff 
of  duties,  and  asking  such  a  modification  of  the  same  as  shall  be 
consistent  with  the  purposes  of  revenue,  and  equal  in  its  operation 
on  the  different  parts  of  the  United  States,  and  on  the  various 
interests  of  the  same. 

Acting  under  that  appointment,  your  memorialists  respectfully 
pray:  — 

ist.  That  the  duties  be  so  reduced,  as  to  leave,  after  the  extin- 
guishment of  the  public  debt,  only  that  amount  of  revenue  which 
may  be  necessary  to  meet  the  ordinary  exigencies  of  Government. 

2dly.  That,  allowing  a  reasonable  time  for  a  gradual  reduction  of 
the  present  exaggerated  duties  on  some  articles,  the  duties  on  all 
the  imported  articles  not  free  of  duty  be  ultimately  equalized,  so  as 
that  the  duty  on  any  such  article  shall  not  vary  materially  from  the 

1  Albert  Gallatin    (1761-184Q)    was  chairman    of  the  committee  and   wrote 

the  report. 

480 


FREE  TRADE  MEMORIAL  481 

general  average  rate  of  all  the  duties  together,  or,  in  other  words, 
from  a  uniform  duty  ad  valorem  on  all  imported  articles  subject 
to  duty. 

3dly.  That  wines,  teas,  coffee,  and  similar  articles,  be  not  added 
to  the  list  of  those  now  free  of  duty,  but  may,  on  the  contrary,  be 
subject  to  duties  corresponding,  in  proportion  to  their  respective 
value,  with  those  laid  on  other  imported  articles  subject  to  duty. 

*J/,  J/-  .it  J/-  Jt.  ^  Jf;  ^  Ji-  -It 

Your  memorialists  are  aware  that,  even  for  the  purposes  of  rev- 
enue, a  strict  adherence,  in  every  instance,  to  a  uniform  rate  of  duty 
would  be  attended  with  great  inconvenience.  There  is  propriety  in 
taxing  articles  of  luxury  in  preference  to  those  more  generally  used 
by  the  less  wealthy  classes  of  society.  Yet  it  is  found  necessary 
to  lessen  the  duty  on  watches,  jewelry,  thread  lace,  and  other  articles, 
which  from  their  great  value  in  a  small  bulk  may  with  facility  be 
fraudulently  imported. 

Considerations  of  a  higher  nature  may  render  a  great  reduction 
of  the  duties  on  spirits  improper.  An  exception  has  always  been 
admitted  with  respect  to  articles  necessary  for  the  defense  of  the 
country.  When  asking  for  a  uniform  duty  which,  whether  specific  or 
laid  ad  valorem,  shall  not  exceed  the  rate  of  20%  to  259^, ,  as  suffi- 
cient for  the  purposes  of  revenue,  your  memorialists  submit  the 
proposition  as  a  general  principle.  But,  whilst  admitting  that  duties 
not  exceeding  in  the  aggregate  the  amount  thus  required  may  be 
arranged  as  the  necessary  exceptions  to  the  general  rule  shall  require, 
they  contend  that  any  considerable  variation  from  the  average  rate, 
for  the  purpose  of  favoring  special  branches,  is  injurious  to  American 
industry,  attended  with  certain  national  loss,  unequal  and  oppressive 
in  its  operation,  both  with  regard  to  the  several  classes  of  society  and 
to  the  several  sections  of  the  country. 

We  are  not  called  upon  to  discuss  the  abstract  question  whether 
another  mode  of  taxation  would  be  more  eligible  than  the  impost, 
or  whether  an  unrestrained  intercourse  between  all  nations,  free  of 
the  payment  of  any  duties  on  imports,  would  be  best  calculated  to 
promote  the  industry  and  prosperity  of  all.  On  that  subject  the 
experience  of  forty  years  is  conclusive,  so  far  as  relates  to  the  United 
States.  The  people  prefer,  in  time  of  peace,  duties  raised  on  the 
importation  of  foreign  merchandise  to  any  internal  tax,  direct  or 


482  GALLATIN 

indirect.  Whether  for  good  or  for  evil,  that  system  affords  an 
encouragement  to  domestic  manufactures  not  less  efficient  for  being 
incidental.  Duties  on  imports,  amounting  on  an  average  to  about 
20 '/Y  on  the  value,  appear  necessary  to  the  support  of  Government. 
Although  they  may,  to  that  extent,  by  diverting  national  industry 
from  its  natural  channels,  render  it  less  productive ;  although  they 
may,  to  that  extent,  lay  a  tax  on  the  consumers  in  addition  to  that 
which  is  paid  to  Government ;  although  they  operate  unequally  on 
different  sections  of  the  country ;  all  your  memorialists  ask  is,  that 
the  evil  shall  not  be  aggravated  by  an  inequality  in  the  rates  of  duty. 
The  question  then  at  issue  is,  simply,  whether  the  amount  wanted 
shall  be  so  raised  as  to  fall  equally  upon  all  the  consumers,  or,  in 
other  words,  on  the  community,  and  so  as  to  encourage  equally  every 
branch  of  industry,  or  whether  certain  branches  shall  receive  special 
protection  by  high  and  sometimes  prohibitory  duties. 

Whether  taxes  are  laid  on  income  or  on  consumption,  it  is  equally 
the  duty  of  a  government  founded  in  justice  to  lay  them  equally  on 
all,  in  proportion,  as  the  case  may  be,  to  the  income  or  the  consump- 
tion. Were  there  no  taxes  of  the  latter  description,  every  part  of 
the  country,  and  every  class  of  society,  would  be  left  at  liberty  to 
supply  its  wants  on  the  cheapest  terms,  and  to  pursue  that  branch 
of  industry  for  which  each  was  best  fitted.  If  a  tax,  equivalent  to 
an  average  duty  of  2070  (or  at  any  other  rate)  on  all  foreign  com- 
modities becomes  necessary  for  the  support  of  Government,  and  is 
laid  at  an  equal  and  uniform  rate  on  all  such  commodities,  all  the 
sections  of  the  country,  classes  of  society,  and  individuals,  are  left 
'  as  far  as  practicable  in  the  same  relative  situation  as  before.  But 
any  law  materially  varying  the  rate  on  any  of  the  taxed  articles 
will  in  some  respect  change  that  relative  situation,  and  to  an  extent 
proportionate  to  the  change  render  the  burden  of  the  tax  unequal. 
An  alteration  which  thus  deranges  the  natural  order  of  things  should 
at  least  be  productive  of  an  adequate  and  indisputable  advantage 
to  the  community.  Higher  duties  on  luxuries  than  on  articles 
generally,  and  in  some  cases  exclusively,  used  by  the  less  wealthy 
classes  of  society,  are  justified  by  the  propriety  of  laying  a  heavier 
burden  on  those  who  are  the  best  able  to  bear  it.  The  domestic 
manufacture  of  a  sufficient  stock  of  arms,  by  Government  or  by  con- 
tract, at  a  much  higher  price  than  they  could  be  procured  abroad 


FREE  TRADE  MEMORIAL  483 

may  be  necessary,  in  order  to  secure  at  all  times  a  supply  of  those 
indispensable  means  of  defense.  Raw  materials  are  admitted  free 
of  duty,  because  they  are  not,  in  that  state,  immediate  objects  of 
consumption,  but  necessary  for  the  production  of  commodities  to 
which  the  national  industry  may  be  advantageously  applied.  The 
presumed  advantages  of  the  restrictive  system  should  be  equally 
palpable  and  clearly  demonstrated :  the  burden  of  the  proof  lies 
altogether  on  its  advocates. 

Let  it,  however,  be  recollected  that  even  the  general  benefit  aris- 
ing to  the  country  at  large  may  not  always  be  a  sufficientjustification 
of  great  and  important  deviations  from  the  equal  and  uniform  sys- 
tem of  taxation.  A  government  which  acknowledges  the  principle 
that  no  individual  can  be  divested  of  his  property  for  public  pur- 
poses without  indemnity  cannot  claim  the  right  to  do  that  indirectly 
which  it  is  forbidden  to  do  directly.  A  system  calculated  to  lay  per- 
manent burdens,  greatly  unequal  and  oppressive,  on  some  classes 
of  society,  or  on  a  particular  section  of  the  country,  would  be  radi- 
cally unjust  and  altogether  indefensible,  even  though  it  might  be  at- 
tended with  some  advantages  to  the  community  considered  as  a 
whole.  But  whether  such  advantages  are  in  fact  realized ;  whether, 
on  any  supposition,  they  ever  can  produce  a  profit  equal  to  the 
actual  national  loss  arising  even  from  the  indispensable  duty  of  20% 
to  25%,  must  be  first  examined. 

It  is  self-evident  that  the  industry  of  a  country  is  most  profitably 
employed,  or,  in  other  words,  that  a  country  acquires  the  greatest 
wealth,  and  its  general  prosperity  is  most  advanced,  in  proportion 
as  its  capital  and  labor  are  most  productive. 

It  is  not  less  obvious  that,  if  a  given  amount  of  capital  and  labor 
produces  in  the  same  time  a  less  quantity  of  a  certain  commodity 
than  could  have  been  purchased  with  that  quantity  of  another  article 
which  might  have  been  produced  in  the  same  time  by  the  same 
amount  of  capital  and  labor,  there  has  been  a  misapplication  of  such 
capital  and  labor,  and  a  national  loss  equal  to  the  difference  between 
the  quantity  produced  and  that  which  might  have  been  purchased 
with  the  proceeds  of  the  same  capital  and  labor  otherwise  applied. 

If  the  price  at  which  a  commodity  can  be  afforded  by  the  person 
who  undertakes  to  produce  it  is  higher  than  that  at  which  it  may  be 


484  GALLATIN 

or  might  have  been  purchased  from  others,  the  difference  of  price 
is  the  measure  of  the  national  loss  incurred  by  his  misapplication  of 
capital  and  labor  to  the  production  of  that  commodity. 

With  one  thousand  bushels  of  wheat,  worth  $1  a  bushel,  one 
thousand  yards  of  cloth  of  a  certain  quality  may  be  purchased.  If 
the  capital  and  labor  employed,  or  which  might  be  employed,  in 
producing  the  thousand  bushels  of  wheat,  do,  when  applied  to  the 
production  of  similar  cloth,  produce  in  the  same  time  one  thousand 
yards,  there  is  neither  comparative  gain  or  loss  in  that  application 
of  capital  and  labor.  But,  if  thus  applied,  it  produces  only  eight 
hundred  yards,  there  is  an  actual  national  loss  of  two  hundred 
yards,  equal  to  S200  or  to  two  hundred  bushels  of  wheat,  since  the 
same  labor  and  capital,  if  applied  to  the  production  of  wheat,  would 
have  produced  one  thousand  bushels,  with  which  one  thousand  yards 
of  the  cloth  might  have  been  purchased. 

There  is  not  the  slightest  difference  in  the  result,  whether  the  cloth, 
which  might  have  been  thus  purchased  at  $1  a  yard,  was  manufac- 
tured in  the  same  district  where  the  unfortunate  new  undertaker 
resided,  or  whether  it  was  imported,  either  from  another  district  of 
the  same  country  or  from  a  foreign  country.  In  either  case,  it  is 
again  self-evident  that  the  national  loss  is  precisely  the  same. 

If  the  new  manufacturer  (making  a  reasonable  profit)  can  afford 
to  sell  his  cloth  at  $1  a  yard,  it  is  a  proof  that  there  has  been  no 
misapplication  of  capital  and  labor,  and  neither  comparative  gain 
or  loss,  in  having  produced  cloth  instead  of  wheat.  But  if  he  cannot 
afford  without  loss  to  sell  the  cloth  for  less  than  $1.25  a  yard ;  if  he 
cannot  (making  a  reasonable  profit)  afford  to  sell  eight  hundred 
yards  for  less  than  $1,000;  it  is  certain  that  the  same  capital  and 
labor,  which  might  have  been  applied  in  producing  one  thousand 
bushels  of  wheat,  with  which  one  thousand  yards  of  the  cloth  might 
have  been  purchased,  has  within  the  same  time  produced  but  eight 
hundred  yards,  and  that  a  national  loss  equivalent  to  $200,  or  to 
two  hundred  bushels  of  wheat,  has  been  incunred  by  this  misappli- 
cation of  the  national  industry. 

The  difference  between  the  price  at  which  a  manufacturer  can 
afford  to  sell  the  whole  amount  of  the  commodities  produced  by 
him  in  one  year,  and  that  at  which  the  same  quantity  of  the 
same  articles  may  be,  or  might  have  been,  purchased  from  others,  is 


FREE  TRADE  MEMORIAL  485 

therefore  equal  to  the  annual  national  profit  or  loss  resulting  from 
his  application  of  capital  and  labor  to  that  instead  of  any  other 
branch  of  industry. 

When  the  new  manufacturer  has  to  compete  with  others  of  the 
same  country,  or,  if  there  is  no  duty  on  imports,  with  foreign  manu- 
facturers, as  it  is  impossible  for  him  to  sell  cloth  of  the  same  quality 
at  a  higher  price  than  it  can  be  obtained  from  others,  the  loss  must 
necessarily  fall  on  him.  This  is  not  the  less  a  public  loss  on  that 
account.  On  whomsoever  this  may  fall,  a  diminution  of  the  quan- 
tity or  exchangeable  value  of  the  commodities  which,  with  the  same 
capital  and  labor  otherwise  applied,  might  have  been  produced  is  so 
much  retrenched  from  what  would  otherwise  have  been  an  accumu- 
lation of  capital  or  national  wealth. 

Although  there  may  be  occasional  rash  undertakings,  it  is  also 
an  indisputable  truth,  that  the  immense  majority,  even  of  this  most 
enterprising  nation,  pursues  only  such  branches  of  industry  as  are 
attended  with  profit.  The  losing  manufacturer,  having  discovered 
his  error,  would  not,  if  let  alone,  persevere  in  ruining  himself ;  and 
such  abortive  attempts,  abandoned  in  time,  would  on  the  whole 
produce  but  a  comparatively  small  loss  to  the  community.  It 
happens  quite  otherwise  when  from  any  peculiar  circumstances  the 
legislature  is  unfortunately  induced  to  interfere  in  the  pursuits  of 
industry,  instead  of  confining  its  care  to  that  of  providing  by  wise 
laws  for  the  security  and  equal  protection  of  the  personal  rights  and 
property  of  every  individual. 

If  the  competition  is  with  foreign  merchandise,  and  the  legislature 
lays  on  this  a  duty  of  25%  ad  valorem,  the  importer  cannot  afford 
the  cloth  which  he  previously  sold  at  Si  for  a  price  less  than  $1.25 
a  yard.  The  manufacturer  at  home  is  thus  enabled  to  sell  his  at  the 
same  price,  and  by  obtaining  $1,000  for  the  eight  hundred  yards, 
to  receive  the  same  reasonable  profit  as  at  the  time  may  generally 
be  derived  from  the  application  of  capital  and  labor  in  similar  pur- 
suits. Since  the  duty  in  this  instance  is  not  prohibitory,  the  cloth  of 
that  quality  which  is  wanted  for  the  consumption  of  the  country 
will  be  supplied  in  part  by  the  foreign  importers  and  partly  by  the 
home  manufacturers.  On  the  whole  amount,  whether  foreign  or 
domestic,  the  consumer  will  be  obliged,  so  long  as  there  is  no  general 
reduction  of  price,  to  pay  25%  more  than  formerly.    The  amount  of 


486  GALLATIN 

the  additional  price  thus  paid  for  tlie  foreign  cloth,  being  paid  by  the 
importer  into  the  Treasury,  is  only  an  additional  tax,  which,  as  it 
relieves  from  the  payment  of  some  other  tax  otherwise  necessary, 
cannot  be  considered  as  an  actual  loss  to  the  community.  The  addi- 
tional price  paid  on  the  domestic  cloth  is  equally  a  burden  on  the 
consumer,  but  being  paid  not  to  Government  but  to  the  manufacturer 
is  an  actual  national  loss.  The  same  loss  is  incurred  in  the  manu- 
facture of  the  cloth  as  if  the  duty  had  not  been  laid ;  and  its  only 
effect  is  to  transfer  that  loss  from  the  manufacturer  to  the  consumer. 

The  duty  may  not  always  be  laid  so  as  to  be  nearly  equal  to  the 
difference  between  the  price  at  which  the  domestic  manufacture  can 
be  afforded  and  that  at  which  a  similar  foreign  article  might  have 
been  previously  purchased. 

If  the  duty  is  much  less  than  that  difference,  it  is  only  a  fiscal 
measure,  and  does  not  enable  the  manufacturer  to  carry  on  his  busi- 
ness. All  the  cloth  of  the  quality  on  which  the  duty  is  laid  will  still 
be  imported  from  abroad,  but  the  additional  price  at  which  it  is  sold 
is  only  a  tax  on  the  consumer,  and  being  paid  to  the  Government 
does  not  amount  to  a  national  loss. 

If  the  duty  is  much  greater  than  that  difference,  as  the  domestic 
article  can  be  manufactured  at  a  price  less  than  the  aggregate  of  the 
duty  and  of  the  price  at  which  the  same  foreign  article  might  have 
been  purchased  previous  to  the  duty,  the  price  will  probably  be 
reduced  by  domestic  competition  to  that  at  which  it  can  be  manu- 
factured and  afforded  with  the  ordinary  rate  of  profit.  The  duty 
becomes  then  prohibitory ;  the  whole  amount  consumed  is  of  domes- 
tic manufacture ;  the  consumer  still  pays  the  whole  amount  of  the 
difference  between  that  at  which  that  manufacture  can  be  afforded 
and  that  at  which  the  similar  foreign  article  might  have  been  pre- 
viously purchased,  and  as  no  portion  is  paid  into  the  public  Treasury, 
the  whole  of  that  amount  is  a  public  loss. 

In  every  case  the  difference  between  the  former  price  and  that  at 
which  the  domestic  manufacture  can  be  sold  with  a  reasonable  profit 
is  to  the  whole  extent  of  that  manufacture  a  loss  to  the  community. 
That  difference  is  equal,  or  nearly  equal,  on  each  yard  of  cloth,  to 
the  duty  laid  on  a  yard  of  the  similar  foreign  article,  whenever  that 
duty  is  not  too  high  to  prevent  partial  foreign  importations :  it  is 
less  per  yard  than  the  duty,  when  this  is  higher  than  is  necessary 


FREE  TRADE  ME:M0RIAL  487 

for  the  encouragement  of  the  domestic  manufacture,  and  becomes 
prohibitory ;  but  in  this  case,  the  whole  amount  consumed  being  of 
domestic  manufacture,  the  aggregate  public  loss  is  greater  than 
when  the  duty  admitted  is  of  foreign  competition. 

It  may  be  urged  that  these  evils  are  compensated  by  extraneous 
advantages  which  may  accrue  to  the  country  from  the  establishment 
of  manufactures ;  and  as  those  cannot  be  indefinite,  they  should  be 
compared  with  the  national  loss  which  necessarily  flows  from  the 
restrictive  system.  It  may  also  be  asserted  that  the  price  at  which 
the  domestic  manufacture  may  be  afforded  will  be  lessened  by  do- 
mestic competition,  as  so  that  it  may  not  ultimately  exceed  that  at 
which  similar  foreign  articles  might  have  been  previously  purchased ; 
and  that  assertion  deserves  serious  attention.  But  it  cannot  be 
denied  that  until  the  price  is  thus  reduced,  or  unless  there  are  ex- 
traneous advantages  which  compensate  the  difference  between  the 
former  and  the  new  artificial  price,  that  difference  is  in  the  first 
instance  a  national  loss,  arising  from  what  is  for  the  time  a  misap- 
plication of  capital  and  labor.  For,  in  order  to  disprove  that  posi- 
tion, it  would  be  necessary  to  show  that  there  is  in  the  country  a 
surplus  amount  of  capital  and  labor  which  cannot  be  more  profitably 
employed. 

**         *         *         *         *         *         *         *         *         * 

A  state  of  society  may  indeed  exist,  where,  owing  either  to  a  super- 
abundant population,  to  over  taxation,  to  a  great  inequality  in  the 
distribution  of  wealth  or  in  the  means  of  acquiring  it,  or  to  any 
other  natural  or  artificial  cause,  a  portion  of  an  industrious  popula- 
tion may  occasionally  or  at  all  times  be  in  actual  want  of  employ- 
ment. Of  a  country  thus  situated,  it  may  be  said  that  it  contains  a 
capability  of  labor  beyond  that  actually  put  forth.  The  symptoms 
of  such  a  state  of  things  are  sufficiently  visible ;  workmen  discharged 
or  with  reduced  wages,  asking  employment  and  food,  and  poor  rates 
given  to  able-bodied  men  as  a  supplement  to  their  insufficient  salary. 
We  may  understand  how  in  that  case  a  new  manufacture — some 
new  channels  opened  to  the  national  industry — would,  by  giving 
employment  to  the  laborer,  bring  into  action  an  additional  amount 
of  labor. 

There  may  also  be  countries  favored  with  a  more  genial  climate, 
where  the  wants  being  few,  and  the  absolute  necessary  means  of 


488  GALLATIN 

subsistence  earned  with  less  labor,  long  continued  misgovernment 
has  created  deeply  rooted  habits  of  indolence.  And  such  countries 
may  also  be  said  to  have  a  dormant  power  of  labor  which  a  free  and 
wise  government  might  stimulate  and  put  in  motion. 

The  situation  of  the  United  States  is  the  very  reverse  in  both 
respects.  The  existing  rates  of  wages  stimulate  industry  with  a 
greater  force  than  in  any  other  country ;  and,  as  a  natural  conse- 
quence, there  is  not  on  the  face  of  the  globe  a  nation  encumbered 
with  less  indolence  or  idleness ;  a  population  more  active,  industrious, 
and,  we  believe,  more  productive.  This  will  continue  '^so  long  as 
the  cheapness  of  unimproved  land  shall  offer  a  certain  employment 
to  labor,  and  so  long  as  the  constitution  remains  free  as  it  is."  If 
the  restrictionists  can  find  a  more  powerful  cause,  some  more 
efficient  means  to  stimulate  labor,  and  render  American  industry 
more  productive  and  profitable,  it  will  be  a  great  and  glorious  dis- 
covery. For  if  it  may  perhaps  be  admitted  that  the  national  progress 
in  acquiring  wealth  may  be  tested  by  the  general  rate  of  profits, 
there  can  be  no  doubt,  and  the  most  conspicuous  illustration  of  the 
fact  is  found  in  the  situation  of  the  United  States  compared  with 
that  of  every  other  country,  that  the  greatest  mass  of  comfort 
and  happiness  is  always  found  where  the  remuneration  of  labor  is  the 
highest.  Should  this  prove  to  be  one  of  the  obstacles  to  the  estab- 
lishment of  some  manufactures,  we  nevertheless  pray  that  it  may 
long  so  continue. 

It  is  impossible  that  the  state  of  the  country  should  have  been 
such  as  that  its  capital  and  labor  could  not  have  been  more  advan- 
tageously applied  than  to  branches  of  industry  which,  left  to  them- 
selves, were  attended  with  actual  loss,  without  a  corresponding  great 
and  sensible  diminution  in  the  demand  for  capital  and  the  wages  of 
labor,  neither  of  which  has  been  felt.  So  long  as  those  wages  suffer 
no  diminution,  and  so  long  as  those  employed  in  commercial  and 
even  agricultural  pursuits  continue  to  borrow  large  capitals  at  the 
rate  of  6  %  a  year,  it  is  clear  proof  that  those  pursuits  afford  profits 
at  least  equal  to  that  rate  of  interest,  and  that  an  application  of 
capital  and  labor  to  the  production  of  objects  on  which,  if  not  arti- 
ficially protected,  a  loss  is  experienced,  is  not  at  all  necessary. 

That  by  multiplying  in  any  country  the  channels  of  domestic 
industry,  a  greater  scope  is  given  to  its  application,  a  market  more 


FREE  TRADE  MEMORL\L  489 

diversified  and  less  liable  to  be  glutted  procured  to  its  products,  and 
a  larger  field  opened  to  every  species  of  skill  and  talent,  is  undubi- 
tably  true.  But  to  direct  that  industry  to  unprofitable  pursuits 
which  cannot  be  sustained  without  exaggerated  duties  paid  by  the 
consumer,  and  a  corresponding  national  loss,  does  not  open  new 
channels  of  productive  industry,  but  only  diverts  it  from  profitable 
to  unprofitable  pursuits  to  the  community.  It  is  truly  remarkable 
that  the  advocates  of  the  restrictive  system  should  pretend  to  con- 
sider your  memorialists  as  wild  theorists,  when  there  cannot  be  a 
plainer  matter  of  fact  than  that  if  a  man  pays  two  dollars  more  for 
his  coat,  his  plough,  or  the  implements  of  his  trade,  it  is  a  loss  to 
him,  which  he  must  pay  out  of  the  proceeds  of  his  industry,  and 
that  the  aggregate  of  those  individual  losses  is  an  actual  national  loss. 
*********** 

Every  nation  takes  a  laudable  pride  in  all  that  contributes  to 
elevate  its  character ;  in  every  progress  made  in  science,  letters,  arts, 
wealth,  and  power ;  in  all  that  constitutes  an  advanced  state  of 
civilization.  To  substitute  American  for  foreign  industry  whenever 
the  substitution  is  advantageous  is  an  object  in  which  all  cordially 
unite.  But  whether  taking  advantage  of  that  general  and  patriotic 
feeling,  or  carried  away  by  it,  the  advocates  of  restriction  contend 
that  a  trade  in  foreign  commodities  which,  without  regard  to  price, 
might  be  produced  by  domestic  industry  always  interferes  with  that 
industry.  They  denounce  and  would  proscribe  that  trade  altogether, 
and  thus  in  reality  inflict  the  most  serious  injury  on  that  object 
which  they  pretend  to  protect.  Laws  which  do  not  trust  the  common 
sense  of  the  citizen,  which  do  not  permit  him  to  seek  what  he  thinks 
the  best  market  for  the  products  of  his  industry,  or  which  compel  him 
to  receive  in  exchange  for  these  a  less  quantity  of  the  objects  he 
wants  than  without  those  laws  he  might  have  obtained,  are  evidently 
destructive  of  domestic  industry.  By  free  trade  we  mean  that  trade 
which  we  may  carry  free  of  any  restrictions  imposed  by  our  own 
government.  It  is  synonymous  with  free  industry,  and  it  is  only 
because,  and  as  far  as,  it  promotes  domestic  industry  that  we  object 
to  those  restrictions.  When,  in  order  to  justify  that  system,  it  is 
said  that  nations  are  adversary  to  each  other,  and  that  a  free  trade 
between  them  would  contravene  the  arrangements  of  Providence ; 
when  it  seems  to  be  forgotten  that  it  is  commerce  which  unites  the 


490  GALLATIN 

several  nations  of  the  civilized  world,  and  that  next  to  Christianity 
it  is  principally  to  commerce  that  we  are  indebted  for  modern 
civilization,  we  can  but  lament  the  extremes  to  which  enlightened, 
patriotic,  and  philanthropic  men  may  be  carried  by  adhering  to  a 
favorite  theory  and  losing  sight  of  every  other  consideration. 

Foreign  commerce  or  the  exchange  of  domestic  for  foreign  com- 
modities is  of  the  same  nature,  and  founded  on  the  same  principle,  as 
commerce  between  different  parts  of  the  same  country  or  that 
between  individuals  of  the  same  district  of  country.  Every  indi- 
vidual, district  of  country,  and  country  acquires  wealth  in  propor- 
tion as,  with  the  same  capital  and  labor,  the  greatest  quantity  or 
exchangeable  value  of  commodities  is  produced.  Whence  inevitably 
follows,  in  every  case,  the  mutual  advantage  of  exchanging  articles 
produced  cheaper  by  one  individual  for  such  as  are  produced  cheaper 
by  another,  or  of  exchanging  articles  produced  cheaper  at  home  than 
abroad  for  those  which  may  be  produced  cheaper  abroad  than  at 
home.  The  division  of  labor  which  increases  the  skill  of  every  indi- 
vidual in  his  particular  branch  is  the  foundation  of  the  commerce  or 
mutual  exchange  of  commodities  between  individuals  living  in  the 
same  vicinity.  That  between  different  parts  of  an  extensive  country 
or  between  different  countries  has  its  origin  in  the  difference  of 
climate,  of  capital,  of  the  density  or  nature  of  the  population,  and  of 
long-acquired  habits  and  corresponding  skill  in  particular  branches 
of  industry.  The  causes  which  give  rise  to  commerce,  as  well  as  its 
advantages  or  presumed  inconveniences,  are  precisely  the  same, 
whether  that  commerce  is  carried  between  different  nations  or  be- 
tween different  parts  of  the  same  country.  The  misapplication  of 
capital  and  labor  has  the  same  effect,  whatever  may  be  the  cause 
which  enables  an  individual  or  a  nation  to  produce  a  certain  commod- 
ity with  less  capital  and  labor,  and  to  sell  it  at  a  lower  price  than 
another  individual  or  another  nation. 

Those  truths  are  too  obvious  to  be  denied  in  direct  terms,  but  they 
are  disregarded ;  and  several  allegations  are  made,  tending  to  show 
that  an  unrestricted  intercourse  between  two  nations  is  fatal  to  one 
or  ruinous  to  both. 

I.  We  have  not  been  fortunate  enough  to  discover  on  what  prin- 
ciple or  by  what  fact  it  can  be  proved  that  such  intercourse  "  reduces 
the  labor  of  one  to  the  same  scale  of  compensation  with  the  labor  of 


FREE  TRADE  MEMORIAL  491 

the  other,  to  the  great  injury  of  that  nation  whose  labor  stood 
highest  on  the  scale." 

Wages  are  one  of  the  elements  of  the  price  of  commodities ;  and  if 
higher  in  a  country  which  nevertheless  affords  certain  commodities 
at  a  less  price  than  the  country  where  the  wages  are  lower,  there 
must  be  a  difference  in  climate,  soil,  skill,  or  some  other  circum- 
stance which  produces  that  result.  But  in  each  country  the  price  of 
labor  is  determined  either  by  its  productiveness  or  by  the  proportion 
between  demand  and  supply  in  that  'country,  and  in  no  manner 
whatever  by  what  may  be  that  productiveness  or  that  proportion  in 
any  other  country,  whether  there  is  or  is  not  an  intercourse  between 
the  two  countries.  We  have  heard  that  Irish  laborers,  flocking  in 
great  numbers  to  England  and  Scotland,  have  by  deranging  the 
existing  proportion  between  demand  and  supply,  and  by  the  low  rate 
of  wages  to  which  they  were  used,  lowered  in  certain  seasons  the 
price  of  labor  in  those  two  countries ;  but  so  long  as  they  remained 
at  home  and  did  not,  by  transferring  their  labor  to  the  spot,  inter- 
fere with  that  of  England,  the  long-continued  intercourse  between 
the  two  countries  never  had  the  slightest  effect  on  the  price  of  Eng- 
lish labor,  which,  varying  according  to  circumstances  exclusively 
belonging  to  England,  has  never  been  reduced  to  the  miserable 
pittance  that  hardly  sustains,  without  remunerating,  the  Irish  laborer. 
This  is  universally  true  with  respect  to  every  country ;  the  price  of 
labor  is  in  each  regulated  exclusively  by  the  respective  proportion 
of  supply  and  demand  and  the  state  of  society.  After  two  centuries 
of  free  commerce  with  Great  Britain,  and  fifty  years  of  a  similar 
intercourse  with  the  rest  of  the  world,  the  price  of  labor  continues 
without  alteration  to  be  higher  in  the  United  States  than  in  England 
or  any  other  country. 

2.  The  circumstances  which  may  tend  to  bring  forth  more  labor 
in  the  application  of  capital  to  certain  domestic  manufactures  than 
in  that  of  the  same  capital  to  other  pursuits  have  already  been  ad- 
verted to ;  at  the  same  time  that  it  has  been  shown  that  the  labor 
employed  in  highly  protected  manufactures  was  nevertheless  less 
productive  than  if  applied  to  other  branches  of  industry.  But  it  is 
asserted,  and  the  general  impression  intended  to  be  made  is,  that 
because  foreign  trade  puts  in  motion  foreign,  this  is  done  at  the 
expense  of  American  industry,  and  that,  therefore,  by  prescribing  the 


492  GALLATIN 

first  this  is  necessarily  encouraged.  This  would  be  true  if  foreign 
merchandise  or  any  part  of  the  foreign  imports  was  bestowed  gratui- 
tously on  the  United  States,  in  which  case  the  Americans  might 
enjoy  the  gift  without  giving  any  labor  in  return ;  but  as  every 
article  imported  must  be  purchased  and  cannot  be  paid  for  by  any 
possible  means  other  than  the  product  of  American  industry,  it 
necessarily  follows  that,  whatever  may  be  the  amount  of  imports 
and  of  foreign  industry  by  which  they  may  have  been  produced,  an 
equal  value  of  American  products  and  an  equal  amount  of  corre- 
sponding American  industry,  is  employed  by  the  foreign  trade.  When 
a  domestic  manufacture  equally  productive  as  any  other  pursuit  is 
substituted  to  the  foreign  articles,  it  puts  in  motion  precisely  the 
same  quantity  of  labor,  the  same  amount  of  American  industry, 
neither  more  nor  less  than  that  which  was  employed  in  producing 
the  articles  with  which  the  foreign  article  was  previously  purchased ; 
the  difference  consists  only  in  the  respective  degree  of  productive- 
ness. The  change  is  advantageous  or  injurious  to  the' country,  as 
the  domestic  manufacture  may  be  more  or  less  productive  than  other 
pursuits  to  which  the  same  capital  and  labor  might  have  been 
applied.  The  error  of  the  restrictionists  consists  in  not  perceiving 
that  the  foreign  trade  promotes  two  equal  amounts  of  foreign  and 
domestic  industry,  and  in  supposing  that  the  American  industry, 
which  in  the  establishment  of  a  new  manufacture  is  substituted  to 
the  foreign  industry,  is  an  addition  to,  instead  of  being  a  deduction 
from,  the  American  industry  which  was  or  might  have  been  other- 
wise employed.  It  is  obvious  that  a  certain  amount  of  American 
industry  which  was  or  might  have  been,  employed  in  producing 
Si, 000,000  worth  of  articles  intended  for  exportation  and  to  be 
exchanged  for  an  equal  value  of  foreign  goods,  cannot,  if  employed 
in  a  domestic  manufacture  of  goods  of  similar  nature,  be  any  longer 
employed  in  producing  the  exportable  articles ;  and  the  only  ques- 
tion is,  whether  that  amount  of  industry  is  more  or  less  profitably 
employed  in  its  new  than  in  its  former  employment. 

3.  Since  the  foreign  imports  must  always  be  paid  for  with  the 
products  of  American  industry,  there  must  always  be  a  tendency  in 
foreign  trade  to  equalize  the  respective  value  of  the  imports  and 
exports.  Though  varying  from  year  to  year,  any  debt  incurred 
must  ultimately  be  paid  out  of  the  same  fund.    The  imports  of  the 


FREE  TRADE  MEMORIAL  493 

United  States  during  the  ten  years,  182 1  to  1830,  have  amounted 
according  to  the  official  accounts  to  $798,630,000,  and  the  exports 
to  $764,803,000.  If  the  amount  of  bulHon  and  specie  imported  and 
exported  is  deducted,  the  annual  average  of  imports  was  $72,948,000, 
and  that  of  exports  $69,327,000.  The  annual  average  of  exports 
of  domestic  produce  was  $53,221,000.  If  the  re-exportations  of 
foreign  merchandise,  valued  at  the  same  price  as  that  of  importa- 
tion, are  deducted  from  the  imports,  and  about  $20,000,000  added  to 
these,  on  account  of  the  difference  between  the  rate  at  which  British 
goods  are  valued  by  law  and  that  of  the  exchange  between  the  two 
countries,  the  annual  average  of  the  foreign  articles  consumed  in  the 
United  States  will  be  found  to  be  about  $60,000,000,  which  is  an 
excess  of  near  $7,000,000  beyond  the  exports  of  domestic  produce. 
According  to  the  official  returns  the  difference  is  less  than  $3,500,000, 
but  the  corrections  are  obviously  necessary.  The  amount  of  the 
earnings  of  American  industry  by  sea,  which  cannot  appear  in  the 
statement  of  exports,  must  be  added  to  these,  since  they  equally  con- 
tribute to  the  payment  of  the  imports.  Those  arising  from  the  fish 
which  from  the  banks  is  carried  directly  to  foreign  ports;  of  the 
whale  and  spermaceti  oil,  sold  by  the  fishing  vessels  in  South 
America ;  of  the  furs  collected  on  the  northwest  coast  and  sold  in 
China ;  and  of  the  freights  on  the  carrying  trade,  that  is  to  say,  on 
voyages  from  a  foreign  to  another  foreign  port,  cannot  be  estimated. 
But  the  freight  on  the  $68,000,000  of  domestic  and  foreign  articles 
annually  exported  from  the  United  States,  calculated  on  the  average 
rates  according  to  the  nature  of  the  merchandise  and  to  the  ports  of 
destination,  exceeds  $11,000,000,  of  which  about  $9,000,000  are 
earned  by  the  American  navigation.  This  result,  whilst  it  illustrates 
the  invariable  correspondence  between  the  value  of  the  imports  and 
that  of  the  exports,  shows  also  that  so  far  from  having  been  inundated 
during  that  period  with  foreign  merchandise  beyond  the  means  of 
payment,  the  amount  of  exports,  including  freight  and  those  items 
which  cannot  be  ascertained,  has  certainly  exceeded  that  of  the 
imports.  The  difference  has  either  been  received  in  precious  metals 
or  applied  to  the  payment  of  a  debt  previously  due  abroad,  and  it  is 
probable  that  both  have  taken  place.  Independent  of  private  remit- 
tances on  foreign  account,  the  amount  of  the  public  debt  reimbursed 
to  foreigners  appears  to  have  exceeded  their  investments  in  other 


494  GALLATIN 

American  stocks ;  and  although,  according  to  the  official  returns, 
which  in  that  respect  are  necessarily  defective,  the  amount  of  pre- 
cious metals  exported  would  appear  to  have  exceeded  by  near 
$2,400,000  that  imported  during  those  ten  years,  it  is  ascertained 
that  the  amount  of  specie  in  the  banks  alone  on  the  ist  of  October, 
1830,  exceeded  by  more  than  $7,000,000  the  amount  at  the  end  of 
the  year  181 9. 

*********** 

4.  The  laws  of  foreign  nations  which  prohibit  or  restrain  the  sale 
of  the  products  of  American  industry  operate  precisely  in  the  same 
manner  as  any  natural  cause  which  confines  the  market  of  those 
products  within  certain  limits.  By  lessening  the  amount  of  the 
exports  or  of  the  means  of  paying  for  foreign  products,  the  restric- 
tive laws  enacted  by  any  foreign  nation  lessen  in  the  same  proportion, 
not  necessarily  the  imports  from  that  nation,  but  the  gross  amount 
of  the  imports  of  the  United  States.  No  legislative  measure  is  req- 
uisite on  their  part  in  order  to  avert  the  imaginary  evil  of  an 
excess  of  imports  over  exports.  The  diminution  of  the  imports  is  a 
natural  and  necessary  consequence  of  the  diminution  of  exports. 
Unless  foreign  commerce  be  considered  as  a  positive  evil,  which  must 
at  all  events  be  annihilated,  there  is  no  occasion  for  passing  retalia- 
tory laws  which,  by  still  more  diminishing  the  imports,  would  neces- 
sarily have  the  same  effect  on  the  exports.  Retaliatory  laws  that 
had  that  effect  would  only  aggravate  the  evil,  if  the  restrictions 
imposed  by  the  foreign  laws  on  American  products  are  admitted 
to  be  an  evil.  They  would  also  be  injurious  if,  by  being  applied 
particularly  to  those  nations  which  had  imposed  the  restrictions, 
they  compelled  Americans  to  purchase  elsewhere  the  commodities 
which  they  want,  and  might  have  purchased  cheaper  from  those 
nations.  The  whole  amount  of  imports  equalizes  itself  with  the 
whole  amount  of  exports.  It  is  not  at  all  necessary  that  this  equality 
should  exist ;  it  never  does  exist  in  the  trade  of  any  country  with 
every  other  country.  Every  one  purchases  what  it  does  want  from 
that  country  which  affords  it  on  the  cheapest  terms,  and  sells  its 
products  to  those  countries  by  which  they  are  wanted  and  which 
give  the  highest  price. 

The  most  zealous  advocates  of  the  protecting  system  do  not 
pretend  that  their  object  is  to  lessen  the  amount  of  the  American 


FREE  TRADE  MEMORIAL  495 

products  which,  notwithstanding  the  restrictive  laws  of  other  nations, 
still  find  a  market  abroad.  They  do  not  say  that  the  cotton  of  the 
South,  and  the  surplus  of  the  wheat  and  other  provisions  of  the  middle 
States  beyond  what  is  wanted  for  home  consumption  shall  not  be 
exported.  They  intend  to  give  an  additional  and  nearer  market  to 
the  cotton  and  wheat  grower,  but  not  to  deprive  them  of  the  foreign 
market  which  is  still  open  to  them ;  to  supply  growing  wants  for 
which  the  lessened  exports  can  no  longer  pay,  and  not  to  increase 
those  wants  by  preventing  foreign  nations  from  paying  for  the 
American  products  which  they  still  wish  to  purchase.  The  restric- 
tions imposed  by  foreign  nations  do  not  afford  a  single  reason,  though 
they  may  serve  as  a  pretense  for  the  adoption  of  restrictive  measures 
on  the  part  of  the  United  States,  which  would  not  equally  apply  if 
the  exports  were  reduced  by  a  natural  cause.  The  question  still 
resolves  itself  into  that  of  public  utility,  and  whether  measures  in- 
tended to  promote  American  industry  fulfill  that  object.  If,  on  the 
contrary,  it  is  made  less  productive  by  the  artificial  direction  given 
to  it  than  if  left  to  itself,  the  fact  that  foreign  nations  have  imposed 
restrictions  injurious  to  the  foreign  trade  of  the  United  States  does 
not  in  the  slightest  degree  change  the  state  of  the  question,  and 
is  no  reason  whatever  why  a  policy  injurious  to  America  should 
be  adopted. 

There  is  an  exception  to  the  general  principle.  Retaliatory  meas- 
ures may  be  resorted  to  with  more  or  less  success,  according  to  cir- 
cumstances, and  as  they  may  be  more  or  less  adapted  to  the  object 
in  view,  for  the  purpose  of  inducing  a  nation  to  alter  her  policy  and 
conduct.  In  that  case  such  measures  are  of  a  temporary  nature,  and 
a  discussion  of  their  propriety  is  foreign  to  the  question  now  under 
consideration.  Had  this  been  the  motive  the  course  pursued  would 
have  been  very  different.  The  commercial  conventions  would,  ac- 
cording to  the  right  reserved,  have  been  abrogated,  and  the  manufac- 
tures of  the  countries  in  question  exclusively  taxed  or  prohibited. 
But  it  is  believed  that  the  advocates  of  the  protecting  system  would 
not  hesitate  to  declare  that  it  is  in  itself  highly  advantageous,  and 
to  avow  that  unless  convinced  of  the  utility  of  a  modification,  they 
will  persevere  in  the  same  policy  even  if  all  the  restrictions  of  foreign 
nations  on  the  American  trade  were  revoked. 


496  GALLATIN 

5.  When  the  general  prevalence  of  the  restrictive  system  and  the 
experience  of  other  nations  are  appealed  to,  the  appeal  is  in  fact  only 
made  to  the  result  of  that  policy  in  England.  For  it  is  in  England 
alone  that  the  prohibitory  system,  and  a  complete  success  in  estab- 
lishing manufactures  generally  superior  in  cheapness  or  quality,  are 
found  united.  The  only  legitimate  inference  that  can  be  drawn  from 
her  example  is  that  both  may  subsist  together.  It  would  require  a 
much  more  minute  knowledge  of  the  origin  and  gradual  progress  of 
the  manufactures  in  that  country  than  any  man  does  possess  to  as- 
certain whether,  in  what  branches,  and  how  far  the  prohibitive 
system  has  promoted  or  impeded  that  progress.  But  if  that  system 
was  the  principal  cause  which  has  made  Great  Britain  the  first 
manufacturing  country  of  the  world  it  would  have  produced  similar 
effects  in  all  the  countries  where  it  was  adopted,  as  well  as  in  all 
the  parts  of  the  same  country,  whilst  those  which  had  rejected  it 
would  be  found  destitute  of  manufactures. 

It  is  quite  true  that  the  restrictive  or  prohibitive  system,  as  a 
branch  of  that  of  monopolies,  is  of  ancient  origin,  and  has  been 
adopted  and  persevered  in  for  centuries,  by  most  European  nations. 
The  only  exceptions  are  perhaps  to  be  found  in  Holland,  which,  from 
her  situation  and  exclusive  attention  to  commerce,  followed  the 
opposite  course,  and  in  those  countries  subdivided  into  states  or 
communities  which,  like  the  United  States  before  the  adoption  of 
the  present  Government,  could  not  unite  in  a  general  system.  The 
first  obvious  reflection  is,  why  the  result  has  been  so  different  in 
different  countries  ?  The  system  appears  to  have  been  early  adopted 
in  Spain.  There  is  hardly  a  treaty  concluded  during  the  seventeenth 
century  between  that  country  and  England,  in  which  there  is  not  a 
clause  for  the  reduction  in  her  favor  of  the  exorbitant  duties  laid 
by  Spain  on  certain  manufactures.  We  need  not  state  what  is  the 
situation  of  that  country  in  that  respect.  Though  of  much  more 
ancient  origin,  it  is  admitted  that  the  system  has  rigorously  been 
adhered  to  in  France,  from  the  time  of  Colbert  to  this  moment,  with 
the  single  exception  of  the  few  years  which  intervened  between  the 
treaty  of  commerce  of  1786  with  England,  and  the  wars  of  the 
French  revolution.  France  continues  to  enjoy  the  same  superiority, 
even  over  England,  in  the  silk  manufacture,  which  she  already  had 
in  the  time  of  Colbert ;  but  she  is  yet  unable  to  compete  with  her  in 


FREE  TRADE  MEMORIAL  497 

most  other  branches.  This  is  evident  from  the  statements  of  importa- 
tions into  the  United  States,  which  afford  the  best  criterion  of  the 
manufactures  in  which  each  nation  may  have  a  real  superiority. 
From  France  we  import  silks,  objects  of  taste,  and  fancy  articles, 
but  few  or  no  woollens,  cottons,  linens,  cutlery,  or  manufactures  of 
leather.  And,  as  pointing  out  the  true  cause  of  success,  it  may  be 
observed  that  a  country  may  excel  in  certain  particular  branches  of 
the  same  species  of  manufacture  in  which  it  is  in  general  inferior  to 
its  neighbors.  Thus,  England,  inferior  to  France  in  every  other 
branch  of  the  silk  manufacture,  maintains  her  superiority  in  that  of 
silk  stockings. 

Again,  the  system  has  not  produced  the  same  effect  in  the  different 
parts  of  the  same  country.  Manufactures  flourish  in  Scotland  as 
well  as  in  England,  whilst  those  of  Ireland  continue  in  a  still  more 
depressed  state  than  her  agriculture.  The  central  parts  of  France 
exhibit  a  nearly  similar  inferiority  to  the  northern  section  of  that 
country ;  and  our  southern  and  even  western  States,  to  New  England. 

Switzerland  is  one  of  the  few  European  countries  to  which  the 
restrictive  system  has  not  extended ;  and  is,  nevertheless,  that  which, 
in  proportion  to  her  population  is,  next  to  England,  the  first  manu- 
facturing country  of  Europe.  Exposed,  like  her,  to  the  same  revul- 
sions, and  to  periods  of  distress,  when  the  channels  of  superabundant 
manufactured  products  are  obstructed,  Switzerland,  unprotected  by 
any  duties  whatever  on  foreign  merchandise,  beside  certain  branches 
belonging  particularly  to  her,  rivals  England  in  the  cotton,  and 
France  in  the  silk  manufacture. 

If  these  observations  do  not  prove  that  the  restrictive  system  may 
not,  in  some  instances,  accelerate  the  establishment  of  manufactures, 
they  show  conclusively  that  a  tariff  acts,  at  best,  but  a  very  second- 
ary part,  and  that  there  are  some  other  causes  far  more  efficient  in 
promoting  domestic  industry.  A  sufficient  capital  and  a  certain 
density  of  population  are  necessary  requisites ;  and  agriculture  will, 
in  preference  to  manufactures,  attract  labor  in  countries  or  districts 
where  virgin  land  is  abundant  and  within  the  reach  of  all.  But  a 
single  glance  at  the  map  of  Europe  will  satisfy  every  intelligent 
observer  that  the  great  superiority  of  some  over  other  countries,  in 
other  respects  equally  fitted  for  manufactures,  is  due  to  the  nature  of 
the  government,  to  laws  which  at  least  secure  to  men  the  proceeds  of 


498  GALLATIN 

their  industry,  to  liberty,  or  at  least  comparative  liberty,  and  to 
the  diffusion  of  knowledge,  and  superior  intelligence,  skill,  and 
activity,  the  infallible  offspring  of  unrestrained  industry,  and  of 
political,  religious,  and  civil  liberty. 

We  may  also,  before  we  dismiss  this  branch  of  the  subject,  and 
in  order  to  rebut  those  general  assertions  of  the  ruin  that  attends 
all  nations  which  rely,  in  any  considerable  degree,  on  foreign  trade 
for  a  market,  appeal  to  that  which  we  know  best,  which  we  have 
seen  and  enjoyed, —  to  the  experience  of  North  America.  Assisted 
only  by  the  ordinary  mechanical  arts,  and  with  hardly  any  manu- 
facturing establishments,  America,  during  two  centuries,  relied  al- 
most exclusively  on  the  cultivation  of  her  soil,  and  on  the  exportation 
of  its  products  to  foreign  ports ;  and  her  progress  during  that  period, 
in  population,  wealth,  and  all  the  arts  of  civilization,  as  well  as  in 
the  general  diffusion  of  knowledge  and  happiness  through  all  the 
classes  of  society,  stands  unparalleled  in  the  annals  of  mankind. 
A  change  of  circumstances  may  induce  a  partial  and  gradual  altera- 
tion in  the  pursuits  of  her  citizens,  and  we  may  rest  assured  that,  if 
not  diverted  by  legislative  interference,  they  will,  as  heretofore,  em- 
brace those  best  adapted  to  their  situation. 

Since  the  national  loss,  produced  by  high  duties  on  importations, 
consists  of  the  difference  between  the  former  and  the  new  artificial 
price,  the  evil  will  cease  whenever  the  product  of  the  protected  domes- 
tic manufacture  can  be  afforded,  and  is  sold  at  the  same  price  as 
the  similar  foreign  article,  free  of  the  protecting  duty.  The  advocates 
of  the  restrictive  system  insist  that  this  is  the  natural  and  necessary 
consequence  of  the  protecting  duty,  and  is  produced  by  the  domestic 
competition. 

It  must  be  observed,  in  the  first  place,  that  domestic  competition 
can  have  no  effect  either  on  the  wages,  the  price  of  the  raw  materials, 
or  that  of  provisions,  of  machinery,  or  of  any  other  article  necessary 
for  the  manufacturing  process.  It  can  operate,  immediately,  only 
on  the  rate  of  profits ;  and,  since  their  insufficiency  is  the  reason  for 
granting  the  protecting  duty,  its  first  effect  is  to  raise  them.  Domes- 
tic competition  may  afterwards  reduce  them  to  a  rate  corresponding 
with  those  of  other  pursuits,  but  after  they  have  been  reduced  to  the 
lowest  possible  rate,  the  price  of  the  protected  commodity  cannot  be 


FREE  TRADE  MEMORIAL  499 

lessened,  otherwise  than  by  a  corresponding  diminution  in  the  cost 
of  producing  it.  A  reduction  of  the  price  of  labor,  or  of  the  raw 
material,  are  circumstances  independent  of  the  tariff,  and  over  which 
the  manufacturer  has  no  control.  Towards  reducing  the  cost  of 
producing  the  commodity,  competition  can  have  no  effect,  but  in  as 
far  as  it  may  stimulate  improvements  in  the  manufacturing  process ; 
and  for  this  there  must  be  a  sufficient  motive. 

Secondly,  competition  does  not  even  reduce  profits  to  their  lowest 
rate,  unless  the  supply  of  the  domestic  commodity  is  equal  to  the 
wants  of  the  country.  Whenever,  and  so  long  as,  this  is  not  the  case, 
a  monopoly  is  created,  which  will  be  attended  with  all  its  usual 
consequences.  If,  instead  of  an  elevated  rate  of  duty,  the  similar 
foreign  article  is  altogether  prohibited,  the  exorbitant  price  of  the 
domestic  commodity  is  checked  only  by  the  lessened  demand  for 
it.  That  price  is  limited  by  that  at  which  the  foreign  article  can  still 
be  purchased,  and  by  that  alone,  when  the  importation  is  not  pro- 
hibited, but  only  charged  with  a  heavy  duty.  Improvements,  tending 
to  lessen  the  cost  of  production,  may,  in  that  case,  still  be  introduced 
by  the  manufacturer  for  his  own  benefit ;  but  the  price  of  the  domes- 
tic commodity  will,  nevertheless,  be  exclusively  regulated  by  that  at 
which  the  similar  foreign  article  may  be  obtained. 

It  is,  therefore,  only  when  the  supply  of  the  domestic  manufac- 
ture is,  or  may  within  a  very  short  time  be  made,  equal  to  the  full 
demand  of  the  country,  that  domestic  competition  may  reduce  the 
rate  of  profits,  and  ultimately  the  cost  of  production.  It  cannot  be 
doubted  that,  when  the  competition  is  with  foreign  articles,  the 
necessity  of  introducing  the  improvements  requisite  for  that  purpose 
is  much  greater  than  when  it  is  only  between  the  American  manu- 
facturers. When  the  manufacture  is  already  established  at  the  time 
of  laying  the  protecting  duty,  the  improvements  which  may  after- 
wards take  place  would  have  been  introduced  at  least  as  early, 
if  the  restrictive  system  had  not  existed ;  and  there  may  be  in- 
stances where  the  duty  prevents  or  retards  the  adoption  of  such 
improvements. 

But  a  reduction  of  price  is,  in  no  case  whatever,  due  to  the  tariff, 
so  long  as  the  similar  foreign  article  can  still  be  imported,  and  the 
price  of  the  domestic  commodity  is  not  reduced  below  that  at  which 
the  foreign  is  sold.    Under  those  circumstances,   the  reduction  is 


500  .  GALLATIN 

clearly  due  to  a  fall  in  the  price  of  the  foreign  article,  and  is  alto- 
gether independent  of  the  tariff.  If,  in  any  instance,  the  price  of 
the  domestic  article  has,  immediately  after  the  tariff,  fallen  below 
the  price  at  which  the  foreign  article  could,  thenceforth,  be  imported, 
it  only  proves  that  the  duty  was  higher  than  was  necessary  for  the 
ostensible  object  in  view.  The  price  must  fall  as  low  as  that  at 
which  the  foreign  article  might  have  been  purchased  prior  to  the 
protecting  duty,  before  the  national  loss  caused  by  it  ceases.  It  is 
only  then  that  the  domestic  manufacture  proves  successful  and 
beneficial  to  the  consumer,  and  to  the  community  at  large. 

Coarse  cotton  goods  are  the  only  protected  branch  which  comes 
within  that  description,  and  the  causes  of  the  fall  of  price,  which 
operated  almost  simultaneously  in  England  and  America,  are  notori- 
ous and  acknowledged.    They  cannot  be  better  expressed  than  in  the 
words  of  one  of  the  manufacturers  (Mr.  Dexter)  examined  before  the 
Committee  on  Manufactures  in  1828.    "It  is  owing  to  the  improve- 
ment in  machinery,  the  reduced  price  of  raw  cotton,  and  the  in- 
creased skill  in  the  manufacture."    The  reduction  in  the  price  of  the 
raw  material  was  solely  due  to  the  increased  supply  compared  with 
the  demand.    The  manufacture  was  already  firmly  established  before 
the  year  181 6.    As  early  as  the  year  1810,  there  were  north  of  the 
Potomac  fifty  mills  for  spinning  cotton  in  operation,  and  twenty-five 
more  that  went  into  operation  the  ensuing  year.    The  weaving  busi- 
ness had  commenced,  but  was  not  so  far  advanced.    Under  those 
circumstances,  the  improvements  in  machinery  and  the  gradual  ac- 
quisition of  skill  would  have  infallibly  taken  place  with  the  common 
average  duty,  which  was,  at  that  time,  about  ^1%  on  the  value.    It 
is  at  least  doubtful  whether  the  favorable  result  was  hastened  by  the 
tariff  of  18 1 6,  which  gave  a  protecting  duty  of  six  cents  and  a  quarter 
per  yard,  amounting  to  62>4%  actual,  and  equivalent  to  52%  nom- 
inal duty  ad  valorem  on  the  prime  cost  of  the  cheapest  India  cotton 
goods  at  that  time  imported. 

A  similar  fall  of  price,  and  owing  to  the  same  causes,  took  place 
in  England  notwithstanding  the  partial  competition  of  East  India 
goods.  .  .  . 

The  suggestion  that  this  fall  in  Great  Britain  was  in  any  degree 
due  to  the  competition  with  the  American  article,  is  quite  groundless, 
since  it  was  the  result,  partly  of  the  fall  in  the  price  of  the  raw 


FREE  TRADE  INIEMORIAL  501 

material  which  operated  at  the  same  time  on  both  countries,  princi- 
pally of  improvements  which  originated  in  England,  and  were 
subsequently  adopted  in  America. 

*********** 

The  only  effect  that  can  possibly  be  ascribed  to  a  protecting  duty 
is  that  of  encouraging  the  establishment  of  manufactures  which 
would  not  otherwise  have  existed,  or  of  inducing  a  greater  number  of 
persons  to  embark  in  those  already  existing.  The  propriety  of  the 
duty  depends  altogether  on  the  probability  of  speedy  success,  that  is 
to  say,  of  the  manufacture  being  so  far  adapted  to  the  circumstances 
of  the  country  that,  after  having  been  assisted  by  the  duty  in  sur- 
mounting the  first  difficulties  incident  to  every  new  undertaking,  it 
will  be  able  to  sustain  itself,  and  without  such  assistance  to  com- 
pete with  the  foreign  article.  It  has  been  clearly  shown  that  the 
manufacture  is  otherwise  a  losing  concern,  productive  of  national  loss. 

This  leads  to  the  important  distinction  between  a  permanent  and 
a  temporary  protecting  duty ;  the  first  imposing  a  perpetual  tax  for 
the  purpose  of  perpetuating  a  continued  public  loss,  the  other  proper 
only  when  the  prospect  of  speedy  success  is  nearly  certain.  For  if 
necessary  to  be  continued  for  a  long  while,  the  loss  continued  for  a 
period  of  years  may  be  greater  than  the  object  is  worth ;  and  it 
would  have  been  much  wiser  to  wait  till  the  country  was  better 
prepared  for  commencing  the  manufacture.  The  question  is,  how 
the  Legislature,  on  subjects  so  complex,  is  to  decide  whether  there  is 
a  probability  that  the  result  will  in  a  short  time  be  favorable  ?  We 
answer,  first,  that  whenever  the  application  is  for  a  gradually  increas- 
ing instead  of  a  decreasing  rate  of  duties,  it  is  a  complete  proof  that 
the  applicants  wish  a  permanent  and  not  a  temporary  duty ;  sec- 
ondly, that  whenever  the  protecting  duty  required  is  exorbitant,  this 
likewise  clearly  proves  that  there  is  not  any  expectation  of  a  speedy 
favorable  result.  It  is  clear  that  the  protection  required  must  be 
proportionate  to  the  difficulty  of  establishing  the  manufacture,  and 
that  the  country  is  better  prepared  for  those  which  require  the  least 
protection.  A  moderate  and  uniform  duty  will  naturally  encourage 
these,  without  the  necessity  of  any  special  legislative  interference, 
whilst  those  alone  will  be  postponed  which,  for  the  very  reason  that 
they  require  a  higher  protection,  ought  not  yet  to  be  attempted. 
Instead  of  an  artificial  and  precarious  system,  the  progress  will  be 


502  GALLATIN 

natural,  steady,  and  permanent.  The  charges  on  imported  articles 
vary  according  to  their  nature,  are  seldom  if  ever  less  than  io% 
and  sometimes  amount  to  20%.  A  general  duty  of  20%  added  to 
those  charges  would  give  an  actual  protection  of  30%,  much  greater 
than  that  under  which  all  the  usual  mechanical  arts  have  been  firmly 
established  in  the  United  States ;  greater  than  is  asked  by  several 
branches  now  suffering  under  the  present  partial  system,  and  amply 
sufficient  for  the  encouragement  of  any  manufacture  which  there  is 
any  probability  of  establishing  successfully  within  a  reasonable  time. 
The  duty  of  30%  substituted  in  England  to  the  entire  prohibition 
of  foreign  silk  stuffs  has,  notwithstanding  the  clamors  of  those  inter- 
ested, promoted,  instead  of  injuring  the  British  manufacture ;  and 
j\Ir.  Hamilton,  so  often  quoted,  never  proposed  a  protecting  duty  of 
15  %  ad  valorem. 

*=^         ********* 

A  uniform  and  moderate  duty  does  not  derange  the  natural  order 
of  things ;  and  instead  of  sustaining,  by  artificial  means,  certain 
manufactures  for  which  the  country  may  not  be  prepared,  at  the 
expense  of  the  community,  and  particularly  of  the  poorer  classes,  to 
the  detriment  of  other  manufactures,  and  to  the  great  injury  of 
some  parts  of  the  country,  it  will  encourage  and  successively  promote 
the  various  branches  of  industry  best  adapted  to  the  state  of  society, 
and  to  the  circumstances  of  the  different  parts  of  the  Union.  A  maxi- 
mum duty  of  25%,  added  to  the  charges  on  importation,  will  give 
to  the  manufactures  that  may  require  it  an  annual  protection  of  35%. 
An  efficient  system  that  will  prevent  frauds,  and,  as  far  as  practi- 
cable, check  irregular  importations  on  foreign  account,  will  insure 
to  the  manufacturer  the  legal  protection  to  its  full  extent ;  and,  given 
in  a  true  spirit  of  compromise  and  conciliation,  it  will  have  that 
stability  indispensable  to  him,  and  on  which  he  never  can  rely  under 
the  present  system. 

Your  memorialists  beg  leave  here  to  observe,  that,  whilst  they  have 
considered  a  duty  of  25%  as  the  highest  that  should,  in  any  case, 
be  allowed,  they  have  not  pretended  to  assert  that  the  average  duty 
required  for  the  exigencies  of  Government  should  be  20  9(  on  the 
value.  If  they  have  adopted  that  rate  in  their  calculations,  it  has 
been  only  in  order  to  meet  any  determination  that  may  be  taken  by 
your  honorable  body,  on  the  amount  of  the  revenue  which  should  be 


FREE  TRADE  MEMORIAL  503 

provided  for,  and  any  difference  of  opinion  respecting  the  probable 
amount  of  importations,  and  the  consequent  productiveness  of  any 
given  percentage.  In  their  own  opinion,  the  average  duty  actually 
required  would  fall  far  short  of  20%. 

After  having  given  the  fullest  consideration  to  this  important  sub- 
ject, your  memorialists  have  not  been  able  to  perceive  any  other 
objection  to  the  immediate  adoption  of  the  plan  which  they  have 
respectfully  suggested,  than  that  which  arises  from  vested  interests. 
These  are  entitled  to  respect  only  because  they  do  exist,  and  not  on 
account  of  any  presumed  legislative  pledge  which  no  legislature  could 
give ;  and  which,  if  so  intended,  your  memorialists  altogether  deny 
to  be  in  any  degree  binding  upon  subsequent  legislatures.  Your 
memorialists  have,  accordingly,  been  instructed  to  express  the  will- 
ingness of  those  in  whose  behalf  they  address  your  honorable  body  to 
acquiesce  in  such  an  interposition  of  the  legislative  power  as  shall  be 
prospective  in  its  operation,  thereby  avoiding  any  sudden  revulsion 
which  might  operate  with  undue  severity  on  the  manufacturing  in- 
terest, but  leading  to  the  desired  result,  with  the  least  possible  injury 
to  the  interests  which  have  grown  up  under  the  existing  system  of 
protective  duties. 

Your  memorialists  trust  that  the  temporary  and  doubtful  advan- 
tages ascribed  to  the  tariff  system,  and  which  may,  perhaps,  accrue 
to  some  particular  districts,  will  not  be  permitted  to  outweigh  con- 
siderations of  a  far  more  important  character.  It  may  justly  be 
expected,  from  the  patriotism  of  those  who  calculate  upon  such 
local  advantages,  that  they  will  not  insist  on  what  is  manifestly  un- 
just, and  persevere  in  a  course  which  disturbs  the  peace  of  the  coun- 
try and  alienates  the  affections  of  a  numerous  portion  of  their 
fellow-citizens. 

Let  it  be  recollected  that  the  system  is,  in  itself,  an  infraction  of 
an  essential  part  of  the  liberty  of  the  citizen.  The  necessity  must  be 
urgent  and  palpable,  which  authorizes  any  government  to  interfere 
in  the  private  pursuits  of  individuals,  to  forbid  them  to  do  that 
which,  in  itself,  is  not  criminal,  and  which  every  one  would  most 
certainly  do,  if  not  forbidden.  Every  individual,  in  every  commu- 
nity without  exception,  will  purchase  whatever  he  may  want,  on  the 
cheapest  terms  within  his  reach.  The  most  enthusiastic  restrictionist, 
the  manufacturer  most  clamorous  for  special  protection,  will  each 


504  GALLATIN 

individually  pursue  the  same  course,  and  prefer  any  foreign  com- 
modity, or  material,  to  that  of  domestic  origin,  if  the  first  is  cheaper, 
and  the  law  does  not  forbid  him.  All  men  ever  have  acted,  and 
continue,  under  any  system,  to  act  on  the  same  principle.  It  is 
impossible  that  they  should  universally  act  in  that  manner,  unless 
it  was  evidently  their  interest  so  to  do.  The  tariff  system  is  founded 
upon  the  principle,  that  what  is  true  of  all  men,  individually,  is 
untrue  when  applied  to  them  collectively.  We  cannot  consider  the 
adherence  of  enlightened  nations  to  regulations  of  that  description, 
but  as  the  last  relic  of  that  system  of  general  restrictions  and  monop- 
olies, which  had  its  origin  in  barbarous  times.  If  the  corn  laws  are 
the  most  odious  of  those  protecting  monopolies,  it  is  because  they 
enhance  the  price  of  that  which  is  still  more  essentially  necessary 
than  sugar,  salt,  clothing,  or  fuel ;  and  we  may  safely  predict  that 
their  repeal  will  be  the  first  result  of  an  improved  representation 
of  the  people. 

Your  memorialists  are  fully  aware  that  acquiescence  in  the  will 
of  the  majority  is  the  indispensable  condition  of  a  representative 
government.  The  true  problem  to  be  solved  in  the  United  States  is 
not  whether  the  people  can  govern  themselves,  of  which  not  the 
slightest  doubt  can  be  entertained,  but  whether  that  government 
can  be  successfully  applied  to  an  extensive  territory,  embracing 
interests  which  must  occasionally  be  in  collision  with  each  other ; 
whether  majorities  formed  by  combinations  of  sectional  interests  will 
be  so  governed  by  a  sense  of  justice  and  a  spirit  of  conciliation  as  not 
to  oppress  those  parts  of  the  country,  whose  rights,  though  they  may 
be  a  minority,  ought,  nevertheless,  to  be  respected.  The  perma- 
nence of  the  Union  and  the  destinies  of  this  great  and  happy  nation 
have  been  intrusted  to  your  honorable  body ;  and,  with  an  humble 
hope  that  your  deliberations  may  be  enlightened  by  Him  to  whom 
the  United  States  are  indebted  for  all  the  blessings  they  enjoy,  your 
memorialists,  as  in  duty  bound,  will  ever  pray,  etc. 

In  behalf  of  the  Committee, 

ALBERT  GALLATIN,  Chairman. 
New  York,  January  23,  1832. 


XIX 

WEBSTER:   SPEECH  OF  1814^ 

SIR,  a  Government  which  cannot  administer  the  affairs  of  a 
nation  without  producing  so  frequent  and  such  violent  altera- 
tions in  the  ordinary  occupations  and  pursuits  of  private  life,  has, 
in  my  opinion,  little  claim  to  the  regard  of  the  community. 

It  has  been  said  that  the  system  of  commercial  restriction  was 
favorable  to  domestic  manufactures,  and  that  if  it  did  nothing  but 
induce  the  habit  of  providing  for  our  own  wants  by  our  own  means, 
it  would  deserve  to  be  esteemed  a  blessing.  Every  gentleman  may 
remember  how  often,  and  how  zealously,  this  consideration  has  been 
urged  upon  us.  Those,  nevertheless,  who  were  opposed  to  it,  and 
who  thought  they  understood  its  real  character  and  true  objects,  did 
not  hesitate  to  predict  that  the  moment  any  supposed  policy  of  the 
Government  required  it,  manufactures  would  be  sacrificed  with  as 
little  reluctance  as  commerce  had  been. 


But  whatever  Government  intends  to  do  on  this  subject,  it  ought 
to  be  frank  and  sincere.  Its  policy  ought  to  be  known,  and  if  it  has 
not  a  total  disregard  to  the  interests  of  the  community,  it  ought  to  be 
constant.  In  respect  to  manufactures,  it  is  necessary  to  speak  with 
some  precision. 

I  am  not,  generally  speaking,  their  enemy.  I  am  their  friend, 
but  I  am  not  for  rearing  them,  or  any  other  interest,  in  hot-beds. 
I  would  not  legislate  precipitately,  even  in  favor  of  them ;  above  all, 
I  would  not  profess  intentions  in  relation  to  them  which  I  did  not 
purpose  to  execute.  I  feel  no  desire  to  push  the  capital  into  extensive 
manufactures  faster  than  the  general  progress  of  our  wealth  and 
population  propels  it. 

1  Daniel  Webster  (1782-1852),  Speech  on  the  Repeal  of  the  Embargo,  in 
the  House  of  Representatives,  April  6,  1814. 

505 


5o6  WEBSTER 

I  am  not  in  haste  to  see  Sheffields  and  Birminghams  in  America. 
Until  the  population  of  the  country  shall  be  greater  in  proportion 
to  its  'extent,  such  establishments  would  be  impracticable,  if  at- 
tempted, and  if  practicable,  they  would  be  unwise. 

Whatever  manufactures  can  be  conducted  in  the  household,  where 
children  may  be  occupied  under  parental  guardianship  and  protec- 
tion, are  useful  in  the  highest  degree.  Many  others,  cotton  and 
woollens  for  instance,  of  which  the  material  constituting  the  article 
of  chief  value,  is  or  may  be  the  produce  of  our  own  soil,  are  likewise 
worthy  of  protection  and  care.  But  of  those  products  of  which  the 
chief  ingredient  is  the  labor  bestowed,  which  can  be  made  profitable 
only  by  division  and  subdivision  of  labor,  and  by  the  toil  of  children 
of  both  sexes,  drawn  together  in  great  numbers,  and  put  out  of 
sight  of  those  who  have  a  natural  interest  in  the  preservation  of  their 
health  and  morals,  one  can  hardly  speak  in  terms  of  so  decisive 
approbation.  Habits  favorable  to  good  morals  and  free  Govern- 
ments, are  not  usually  most  successfully  cultivated  in  populous  manu- 
facturing cities.  It  is  one  of  the  consequences  of  such  employments 
to  render  the  laborer  altogether  dependent  on  his  employer.  This 
arises  from  the  extent  to  which  the  division  of  labor  is  carried  in 
great  manufacturing  establishments.  He  whose  occupation  it  has 
been  for  his  whole  life  to  perform  only  one  of  the  many  operations 
necessary  to  the  production  of  a  single  article,  is  necessarily  among 
the  most  dependent  of  human  beings.  The  trite  example  of  the 
number  of  persons — sixteen  or  eighteen — who  have  all  their  several 
labors  and  operations  in  the  production  of  a  common  brass  pin, 
sufficiently  illustrates  my  idea. 

One  of  these  laborers,  utterly  incapable  of  making  and  carrying 
to  the  market  on  his  own  account  the  smallest  entire  article,  is  neces- 
sarily at  the  mercy  of  the  capitalist  for  the  support  of  himself  and 
family.  Any  cause  which  deprives  him  of  that  particular  occupation 
for  which  only  he  is  fit,  by  habit  and  education,  throws  him  a  burden 
on  society.  As  such  causes  must  occur  often,  it  is  in  the  neighbor- 
hood of  such  establishments  that  hands  unemployed  or  ill  employed 
will  be  found  in  greatest  numbers. 

It  is  in  her  manufacturing  districts  that  England  recruits  her  armies. 
It  is  there,  principally,  that  those  are  found  who  have  the  least  hold 
on  society,  and  where  necessities,  or  where  habits,  force  them  to 


SPEECH  OF   1814  507 

the  camp.  I  am  not  anxious  to  accelerate  the  approach  of  the  period 
when  the  great  mass  of  American  labor  shall  not  find  its  employment 
in  the  field ;  when  the  young  men  of  the  country  shall  be  obliged  to 
shut  their  eyes  upon  external  nature,  upon  the  heavens  and  the 
earth,  and  immerse  themselves  in  close  and  unwholesome  work- 
shops ;  when  they  shall  be  obliged  to  shut  their  ears  to  the  bleatings 
of  their  own  flocks,  upon  their  own  hills,  and  to  the  voice  of  the  lark 
that  cheers  them  at  the  plough,  that  they  may  open  them  in  dust, 
and  smoke,  and  steam,  to  the  perpetual  whirl  of  spools  and  spindles, 
and  the  grating  of  rasps  and  saws.  I  have  made  these  remarks,  sir, 
not  because  I  perceive  any  immediate  danger  of  carrying  our  manu- 
factures to  an  extensive  height,  but  for  the  purpose  of  guarding  and 
limiting  my  opinions,  and  of  checking,  perhaps  a  little,  the  high- 
wrought  hopes  of  some  who  seem  to  look  to  our  present  infant  estab- 
lishments for  "more  than  their  nature  or  their  state  can  bear." 

It  is  the  true  policy  of  Government  to  suffer  the  different  pur- 
suits of  society  to  take  their  own  course,  and  not  to  give  excessive 
bounties  or  encouragements  to  one  over  another.  This,  also,  is  the 
true  spirit  of  the  Constitution.  It  has  not,  in  my  opinion,  conferred  on 
the  Government  the  power  of  changing  the  occupations  of  the  people 
of  different  States  and  sections,  and  of  forcing  them  into  other  em- 
ployments. It  cannot  prohibit  commerce  any  more  than  agriculture ; 
nor  manufactures  any  more  than  commerce.  It  owes  protection  to 
all.  I  rejoice  that  commerce  is  once  more  permitted  to  exist ;  that 
its  remnant,  as  far  as  this  unblessed  war  will  allow,  may  yet  again 
visit  the  seas,  before  it  is  quite  forgotten  that  we  have  been  a  com- 
mercial people.  I  shall  rejoice  still  further,  when  I  see  the  Govern- 
ment pursue  an  independent,  permanent,  and  steady  system  of 
national  politics ;  when  it  shall  rely  for  the  maintenance  of  rights 
and  the  redress  of  wrongs  on  the  strength  and  resources  of  our  own 
country,  and  break  off  all  measures  which  tend,  in  any  degree,  to 
connect  us  with  the  fortunes  of  a  foreign  Power. 


5o8  WEBSTER 


WEBSTER:   SPEECH  OF   1824^ 

The  true  course  then,  sir,  for  us  to  pursue  is,  in  my  opinion,  to 
consider  what  our  situation  is,  what  our  means  are,  and  how  they 
can  be  best  applied.  What  amount  of  population  have  we  in  com- 
parison with  our  extent  of  soil,  what  amount  of  capital,  and  labor 
at  what  price?  As  to  skill,  knowledge,  and  enterprise,  we  may 
safely  take  it  for  granted  that,  in  these  particulars,  we  are  on  an 
equality  with  others.  Keeping  these  considerations  in  view,  allow 
me  to  examine  two  or  three  of  those  provisions  of  the  bill  to  which 
I  feel  the  strongest  objections. 

To  begin  with  the  article  of  iron.  Our  whole  annual  consumption 
of  this  article  is  supposed  by  the  Chairman  of  the  Committee  to  be 
48,000  or  50,000  tons.  Let  us  suppose  the  latter.  The  amount  of  our 
own  manufacture  he  estimates,  I  think,  at  17,000  tons.  The  present 
duty  on  the  imported  article  is  $15  per  ton,  and  as  this  duty  causes 
of  course  an  equivalent  augmentation  of  the  price  of  the  home  manu- 
facture, the  whole  increase  of  price  is  equal  to  $750,000  annually. 
This  sum  we  pay  on  a  raw  material,  and  on  an  absolute  necessary 
of  life.  The  bill  proposes  to  raise  the  duty  from  $15  to  S22.50  per 
ton,  which  would  be  equal  to  $1,125,000  on  the  whole  annual  con- 
sumption. So  that,  suppose  the  point  of  prohibition  which  is  aimed 
at  by  some  gentlemen  to  be  attained,  the  consumers  of  the  article 
would  pay  this  last  mentioned  sum  every  year  to  the  producers  of  it, 
over  and  above  the  price  at  which  they  could  supply  themselves 
with  the  same  article  from  other  sources.  There  w^uld  be  no 
mitigation  of  this  burden,  except  from  the  prospect,  whatever  that 
might  be,  that  iron  would  fall  in  value  by  domestic  competition 
after  the  importation  should  be  prohibited.  It  will  be  easy,  I  think, 
to  show  that  it  cannot  fall ;  and  supposing  for  the  present  that  it 
shall  not,  the  result  will  be  that  we  shall  pay  annually  a  sum  of 
$1,125,000,  constantly  augmented,  too,  by  increased  consumption  of 
the  article,  to  support  a  business  that  cannot  support  itself. 

It  is  of  no  consequence  to  the  argument  that  this  sum  is  expended 
at  home ;  so  it  would  be  if  we  taxed  the  people  to  support  any  other 

1  Daniel  Webster,  Speech  upon  the  Tariff,  in  the  House  of  Representatives, 
April  I  and  2,  1S24. 


SPEECH  OF  1824  5^9 

useless  and  expensive  establishment — to  build  another  Capitol, 
for  example,  or  incur  an  unnecessary  expense  of  any  sort.  The 
question  still  is,  are  the  money,  time,  and  labor  well  laid  out  in 
these  cases?  The  present  price  of  iron  at  Stockholm,  I  am  assured 
by  importers,  is  S53  per  ton  on  board,  S48  in  the  yard  before  load- 
ing, and  probably  not  far  from  $40  at  the  mines.  Freight,  insurance, 
etc.,  may  be  fairly  estimated  at  $15,  to  which  add  our  present  duty 
of  $15  more,  and  these  two  last  sums,  together  with  the  cost  on 
board  at  Stockholm,  give  S83  as  the  cost  of  Swedes  iron  in  our 
market.  In  fact,  it  is  said  to  have  been  sold  last  year  at  $81.50  to 
$82  per  ton.  We  perceive  by  this  statement  that  the  cost  of  the 
iron  is  doubled  in  reaching  us  from  the  mine  in  which  it  is  produced. 
In  other  words,  our  present  duty,  with  the  expense  of  transportation, 
gives  an  advantage  to  the  American,  over  the  foreign  manufacturer, 
of  100%.  Why  then  cannot  the  iron  be  manufactured  at  home? 
Our  ore  is  said  to  be  as  good,  and  some  of  it  better.  It  is  under  our 
feet,  and  the  Chairman  of  the  Committee  tells  us  that  it  might  be 
wrought  by  persons  who  otherwise  will  not  be  employed.  Why  then 
is  it  not  wrought?  Nothing  could  be  more  sure  of  constant  sale. 
It  is  not  an  article  of  changeable  fashion,  but  of  absolute,  perma- 
nent necessity,  and  such,  therefore,  as  would  always  meet  a  steady 
demand.  Sir,  I  think  it  would  be  well  for  the  Chairman  of  the 
Committee  to  revise  his  premises,  for  I  am  persuaded  that  there 
is  an  ingredient  properly  belonging  to  the  calculation  which  he  has 
misstated  or  omitted.  Swedes  iron  in  England  pays  a  duty,  I  think, 
of  about  $2  7  per  ton ;  yet  it  is  imported  in  considerable  quantities, 
notwithstanding  the  vast  capital,  the  excellent  coal,  and,  more  im- 
portant than  all  perhaps,  the  highly  improved  state  of  inland  navi- 
gation in  England ;  although  I  am  aware  that  the  English  use  of 
Swedes  iron  may  be  thought  to  be  owing  in  some  degree  to  its 
superior  quality. 

Sir,  the  true  explanation  of  this  appears  to  me  to  lie  in  the 
different  prices  of  labor ;  and  here  I  apprehend  is  the  grand  mistake 
in  the  argument  of  the  Chairman  of  the  Committee.  He  says  it 
would  cost  the  nation,  as  a  nation,  nothing  to  make  our  ore  into 
iron.  Now,  I  think  it  would  cost  us  precisely  that  which  we  can 
worst  afford  ;  that  is,  great  labor.  Although  bar  iron  is  very  properly 
considered  a  raw  material  in  respect  to  its  various  future  uses,  yet, 


Sio  .  WEBSTER 

as  bar  iron,  the  principal  ingredient  in  its  cost  is  labor.  Of  manual 
labor,  no  nation  has  more  than  a  certain  quantity,  nor  can  it  be 
increased  at  will.  As  to  some  operations,  indeed,  its  place  may  be 
supplied  by  machinery  ;  but  there  are  other  services  which  machinery 
cannot  perform  for  it,  and  which  it  must  perform  for  itself.  A  most 
important  question  for  every  nation,  as  well  as  for  every  individual, 
to  propose  to  itself,  is,  how  it  can  best  apply  that  quantity  of  labor 
which  it  is  able  to  perform  ?  Labor  is  the  great  producer  of  wealth  ; 
it  moves  all  other  causes.  If  it  call  machinery  to  its  aid,  it  is  still 
employed  not  only  in  using  the  machinery,  but  in  making  it.  Now, 
with  respect  to  the  quantity  of  labor,  as  we  all  know,  different 
nations  are  differently  circumstanced.  Some  need,  more  than  any- 
thing, work  for  hands,  others  require  hands  for  work ;  and  if  we 
ourselves  are  not  absolutely  in  the  latter  class,  we  are  still,  most 
fortunately,  very  near  it.  I  cannot  find  that  we  have  those  idle 
hands  of  which  the  Chairman  of  the  Committee  speaks.  The  price 
of  labor  is  a  conclusive  and  unanswerable  refutation  of  that  idea ; 
it  is  known  to  be  higher  with  us  than  in  any  other  civilized  state, 
and  this  is  the  greatest  of  all  proofs  of  general  happiness.  Labor  in 
this  country  is  independent  and  proud.  It  has  not  to  ask  the 
patronage  of  capital,  but  capital  solicits  the  aid  of  labor.  This  is  the 
general  truth  in  regard  to  the  condition  of  our  whole  population, 
although  in  the  large  cities  there  are,  doubtless,  many  exceptions. 
The  mere  capacity,  to  labor  in  common  agricultural  employments 
gives  to  our  young  men  the  assurance  of  independence.  We  have 
been  asked,  sir,  by  the  Chairman  of  the  Committee,  in  a  tone  of 
some  pathos,  whether  we  will  allow  to  the  serfs  of  Russia  and  Sweden 
the  benefit  of  making  iron  for  us?  Let  me  inform  the  gentleman, 
sir,  that  those  same  serfs  do  not  earn  more  than  seven  cents  a  day, 
and  that  they  work  in  these  mines  for  that  compensation  because 
they  are  serfs.  And  let  me  ask  the  gentleman  further,  whether  we 
have  any  labor  in  this  country  that  cannot  be  better  employed  than 
in  a  business  which  does  not  yield  the  laborer  more  than  seven  cents 
a  day?  This,  it  appears  to  me,  is  the  true  question  for  our  consid- 
eration. There  is  no  reason  for  saying  that  we  will  work  iron  be- 
cause we  have  mountains  that  contain  the  ore.  We  might  for  the 
same  reason  dig  among  our  rocks  for  the  scattered  grains  of  gold  and 
silver  which  might  be  found  there.    The  true  inquiry  is,  can  we 


SPEECH  OF  1824  511 

produce  the  article  in  a  useful  state  at  the  same  cost,  or  nearly  at 
the  same  cost,  or  at  any  reasonable  approximation  towards  the  same 
cost,  at  which  we  can  import  it? 

Some  general  estimates  of  the  price  and  profits  of  labor  in  those 
countries  from  which  we  import  our  iron  might  be  formed  by  com- 
paring the  reputed  products  of  different  mines  and  their  prices  with 
the  number  of  hands  employed.  The  mines  of  Danemora  are  said  to 
yield  about  4,000  tons,  and  to  employ  in  the  mines  1,200  workmen. 
Suppose  this  to  be  worth  S50  per  ton  ;  any  one  will  find  by  compu- 
tation that  the  whole  product  would  not  pay  in  this  country  for  one 
quarter  part  of  the  necessary  labor.  The  whole  export  of  Sweden 
was  estimated,  a  few  years  ago,  at  400,000  ship-pounds,  or  about 
54,000  tons.  Comparing  this  product  with  the  number  of  workmen 
usually  supposed  to  be  employed  in  the  mines  which  produce  iron 
for  exportation,  the  result  will  not  greatly  differ  from  the  foregoing. 
These  estimates  are  general,  and  might  not  conduct  us  to  a  precise 
result ;  but  we  know,  from  intelligent  travelers  and  eye-witnesses, 
that  the  price  of  labor  in  the  Swedish  mines  does  not  exceed  seven 
cents  a  day.^ 

The  true  reason,  sir,  why  it  is  not  our  policy  to  compel  our 
citizens  to  manufacture  our  own  iron  is,  that  they  are  far  better 
employed.  It  is  an  unproductive  business,  and  they  are  not  poor 
enough  to  be  obliged  to  follow  it.  If  we  had  more  of  poverty,  more  of 
misery,  and  something  of  servitude,  if  we  had  an  ignorant,  idle,  starv- 
ing population,  we  might  set  up  for  iron  makers  against  the  world. 

iThe  price  of  labor  in  Russia  may  be  pretty  well  collected  from  Tooke's 
"View  of  the  Russian  Empire."  "The  workmen  in  the  mines  and  the  foundries 
are,  indeed,  all  called  master-people;  but  they  distinguish  themselves  into 
masters,  undermasters,  apprentices,  delvers,  servants,  carriers,  washers,  and 
separators.  In  proportion  to  their  ability  their  wages  are  regulated,  which  pro- 
ceed from  IS  to  upwards  of  30  roubles  per  annum.  The  provisions  which  they 
receive  from  the  magazines  are  deducted  from  this  pay."  The  value  of  the  rouble 
at  that  time  (1799)  was  about  24  pence  sterling,  or  45  cents  of  our  money. 

"By  the  edict  of  1799,"  it  is  added,  "a  laborer  with  a  horse  shall  receive, 
daily,  in  summer  20  and  in  winter  12  copecks;  a  laborer  without  a  horse,  in 
summer  10,  in  winter  8  copecks." 

A  copeck  is  the  hundredth  part  of  a  rouble,  or  about  half  a  cent  of  our  money. 
The  price  of  labor  may  have  risen,  in  gome  degree,  since  that  period,  but 
probably  not  much. 


512  WEBSTER 

« 

WEBSTER:   SPEECH  OF  1846^ 

Sir,  with  the  leave  of  the  Senate,  I  shall  proceed  to  consider  the 
effects  of  this  bill  upon  some  of  those  interests  which  have  been 
regarded  as  protected  interests. 

I  shall  not  argue  at  length  the  question,  whether  the  Government 
has  committed  itself  to  maintain  interests  that  have  grown  up  under 
laws  such  as  have  been  passed  for  thirty  years  back.  I  will  not 
argue  the  question,  whether,  looking  to  the  policy  indicated  by  the 
laws  of  1789,  1816,  1824,  1828,  1832,  and  1842,  there  has  been 
ground  for  the  industrious  and  enterprising  people  of  the  United 
States,  engaged  in  home  pursuits,  to  expect  Government  protection 
for  internal  industry.  The  question  is,  Do  these  laws,  or  do  they  not, 
from  1789  till  the  present  time,  constantly  show  and  maintain  a 
purpose,  a  policy,  which  might  naturally  induce  men  to  invest 
property  in  manufactures,  and  to  commit  themselves  to  those  pursuits 
in  life?    Without  lengthened  argument,  I  shall  take  this  for  granted. 

But,  sir,  before  I  proceed  further  with  this  part  of  the  case,  I 
will  take  notice  of  what  appears,  latterly,  to  be  an  attempt,  by  the 
republication  of  opinions  and  expressions,  arguments  and  speeches 
of  mine,  at  an  earlier  and  later  period  of  life,  to  found  against  me  a 
charge  of  inconsistency  on  this  subject  of  the  protective  policy  of  the 
country.  Mr.  President,  if  it  be  an  inconsistency  to  hold  an  opinion 
upon  a  subject  at  one  time  and  in  one  state  of  circumstances,  and 
to  hold  a  different  opinion  upon  the  same  subject  at  another  time 
and  in  a  different  state  of  circumstances,  I  admit  the  charge.  Nay, 
sir,  I  will  go  further ;  and  in  regard  to  questions  which,  from  their 
nature,  do  not  depend  upon  circumstances  for  their  true  and  just 
solution,  I  mean  constitutional  questions,  if  it  be  an  inconsistency  to 
hold  an  opinion  to-day,  even  upon  such  a  question,  and  on  that 
same  question  to  hold  a  different  opinion  a  quarter  of  a  century 
afterwards,  upon  a  more  comprehensive  view  of  the  whole  subject, 
with  a  more  thorough  investigation  into  the  original  purposes  and 
objects  of  that  Constitution,  and  especially  after  a  more  thorough 
exposition  of  those  objects  and  purposes  by  those  who  framed  it, 
and  have  been  trusted  to  administer  it,  I  should  not  shrink  even 

'  Daniel  Webster,  Speech  on  the  Bill  to  reduce  the  Duties  on  Imports,  in  the 
Senate,  July  25  and  27,  1846. 


SPEECH  OF  1846  5^3 

from  that  imputation.  I  hope  I  know  more  of  the  Constitution  of 
my  country  than  I  did  when  I  was  twenty  years  old.  I  hope  I  have 
contemplated  its  great  objects  more  broadly.  I  hope  I  have  read 
with  deeper  interest  the  sentiments  of  the  great  men  who  framed  it. 
I  hope  I  have  studied  with  more  care  the  condition  of  the  country 
when  the  convention  assembled  to  form  it.  And  yet  I  do  not  know 
that  I  have  much  to  retract  or  to  change  on  these  points. 

But,  sir,  I  am  of  the  opinion  of  a  very  eminent  person,  who  had 
occasion,  not  long  since,  to  speak  of  this  topic  in  another  place. 
Inconsistencies  of  opinion,  arising  from  changes  of  circumstances, 
are  often  justifiable.  But  there  is  one  sort  of  inconsistency  which  is 
culpable.  It  is  the  inconsistency  between  a  man's  conviction  and 
his  vote;  between  his  conscience  and  his  conduct.  No  man  shall 
ever  charge  me  with  an  inconsistency  like  that.  And  now,  sir,  allow 
me  to  say,  that  I  am  quite  indifferent,  or  rather  thankful,  to  those 
conductors  of  the  public  press  who  think  they  cannot  do  better  than 
now  and  then  to  spread  my  poor  opinions  before  the  public. 

I  have  said  many  times,  and  it  is  true,  that,  up  to  the  year  1824, 
the  people  of  that  part  of  the  country  to  which  I  belong,  being  ad- 
dicted to  commerce,  having  been  successful  in  commerce,  their  capital 
being  very  much  engaged  in  commerce,  were  averse  to  entering 
upon  a  system  of  manufacturing  operations.  Every  member  in 
Congress  from  the  State  of  Massachusetts,  with  the  exception,  I 
think,  of  one,  voted  against  the  act  of  1824.  But  what  were  we  to 
do?  Were  we  not  bound,  after  18 16  and  1824,  to  consider  that  the 
policy  of  the  country  was  settled,  had  become  settled,  as  a  policy, 
to  protect  the  domestic  industry  of  the  country  by  solemn  laws? 
The  leading  speech^  which  ushered  in  the  act  of  1824  was  called  a 
speech  for  the  "American  System."  The  bill  was  carried  principally 
by  the  Middle  States.  Pennsylvania  and  New  York  would  have  it 
so ;  and  what  were  we  to  do  ?  Were  we  to  stand  aloof  from  the 
occupations  which  others  were  pursuing  around  us?  Were  we  to 
pick  clean  teeth  on  a  constitutional  doubt  which  a  majority  in  the 
councils  of  the  nation  had  overruled  ?  No,  sir ;  we  had  no  option. 
All  that  was  left  us  was  to  fall  in  with  the  settled  policy  of  the 
country ;  because,  if  anything  can  ever  settle  the  practical  construc- 
tion of  the  Constitution  of  the  country,  it  must  be  these  repeated 

iThat  of  Mr.  Clay.    See  below,  Chapter  XX.  (Ed.) 


514  WEBSTER 

decisions.  New  England,  then,  did  fall  in.  She  went  into  manufac- 
turing operations,  not  from  original  choice,  but  from  the  necessity 
of  the  circumstances  in  which  the  legislation  of  the  country  had 
placed  her.  And,  for  one,  I  resolved  then,  and  have  acted  upon  the 
resolution  ever  since,  that,  having  compelled  the  Eastern  States  to 
go  into  these  pursuits  for  a  livelihood,  the  country  was  bound  to 
fulfil  the  just  expectations  which  it  had  inspired. 

There  seems  to  be  a  sedulous  purpose  of  hostility  to  the  manufac- 
turing interests.  I  speak  of  the  tenor  and  tendency,  and  the  general 
spirit  of  this  bill.  It  does  prefer,  by  its  enactments,  and  in  its 
consequences,  foreign  labor  to  domestic  labor.  It  does  encourage 
the  labor  of  foreign  artisans  over  and  above,  and  in  preference  to, 
the  labor  of  our  own  artisans  here  in  the  United  States.  I  aver  it, 
and  I  am  going  to  prove  it.  Now,  if  that  is  made  out,  is  there  a  man 
in  this  chamber  who  will  vote  for  this  bill  ?  And  yet  we  are  told 
from  other  quarters,  that  this  is  a  bill  of  peace,  that  it  will  settle  a 
vexed  question.  Depend  upon  it,  it  will  settle  nothing.  It  is  calcu- 
lated to  raise  a  degree,  I  had  almost  said  of  resentment,  at  all  events 
of  surprise  and  indignation,  not  in  one  man's  breast,  but  in  the 
breasts  of  a  million  of  people,  now  earning  their  bread,  as  they  think, 
under  laws  and  assurances  that  these  laws  shall  be  continued,  which 
enable  them  to  import  the  raw  material  and  work  upon  it,  and  bring 
their  labor  into  market,  as  advantageously  as  the  labor  of  the  foreign 
mechanic.  Call  you  that  a  bill  of  peace  which  disturbs  all  these 
expectations?    It  is  not  peace;  it  is  anything  but  peace. 

Sir,  there  is  an  article,  the  growth  of  which  is  very  interesting  to 
the  Western  States,  being  well  suited  to  the  fertility  of  their  soil. 
It  is  hemp.  The  manufacture  of  that  article  into  cordage  is  essen- 
tial to  the  navigating  interests  of  the  United  States.  This  is  one  of 
the  cases  which  I  have  mentioned,  and  with  reference  to  which  I  wish 
to  read  several  letters  from  highly  respectable  gentlemen. 

*********** 

And  here,  sir,  I  wish  to  advert  to  a  general  fact,  worthy  to  be 
recollected  in  all  our  political  economy.  The  increase  in  the  invest- 
ments of  capital  in  great  works  of  this  kind  tends  to  reduce  the 


SPEECH  OF  1846  5i5 

profits  on  that  capital.  That  is  a  necessary  result.  But  then  it  has 
exactly  the  reverse  action  upon  labor ;  for  the  more  that  capital  is 
invested  in  these  great  operations,  the  greater  is  the  call  for  labor, 
and  therefore  the  ratio  is  here  the  other  way,  and  the  rates  of  labor 
increase  as  the  profits  of  capital  are  diminished.  Well,  is  there  any 
thing  undemocratic  and  unpopular  in  such  a  system  as  that?  a  sys- 
tem that  causes  a  diminution  of  profits  to  the  capitalist  and  an 
increase  of  remuneration  to  the  hand  of  labor. 


Sir,  there  is  another  view  of  this  subject  not  uninteresting,  and 
very  fit  to  be  taken.  What  is  coal  ?  A  coarse  and  raw  natural 
product.  What  is  it  which  has  created  its  value  at  the  moment  it 
comes  to  be  consumed  ?  Clearly,  labor.  It  is  the  product  of  human 
labor;  and  that  labor,  while  giving  value  to  coal,  has  called  for 
contributions  from  many  other  branches  and  varieties  of  human 
labor.  Coal  undug,  and  still  in  the  mines,  at  Pottsville,  is  worth 
twenty  cents  per  ton.  At  the  place  of  consumption,  at  New  York 
or  Boston,  it  is  worth  $5.25  per  ton.  The  difference  is  the  value 
added  to  the  original  material  by  the  hand  of  man ;  and  to  the 
creation  of  this  value,  farmers,  merchants,  tradesmen,  mechanics, 
ship-builders,  sailors,  and  those  employed  in  the  land  transportation, 
have  all  contributed.  To  these,  therefore,  it  has  given  employment. 
The  population  of  Pottsville  is  said  to  consume  a  million  of  dollars 
annually  of  agricultural  products ;  and  another  million,  probably, 
in  manufactured  articles.  Thus  the  miners,  the  farmers,  and  the 
mechanics  stand  side  by  side  in  this  great  interest.  Shall  they  be 
protected  against  injurious  foreign  competition,  or  shall  they  not? 

*********** 

The  interest  of  every  laboring  community  requires  diversity  of 
occupations,  pursuits,  and  objects  of  industry.  The  more  that  diver- 
sity is  multiplied  or  extended,  the  better.  To  diversify  employment 
is  to  increase  employment,  and  to  enhance  wages.  And,  sir,  take  this 
great  truth ;  place  it  on  the  title-page  of  every  book  of  political 
economy  intended  for  the  use  of  the  United  States ;  put  it  in  every 
Farmer's  Almanac ;  let  it  be  the  heading  of  the  column  in  every 


51 6  WEBSTER 

mechanic's  magazine ;  proclaim  it  everywhere,  and  make  it  a 
proverb,  that  where  there  is  work  jor  the  hands  of  men,  there  will 
be  work  jor  their  teeth.  Where  there  is  employment,  there  will  be 
bread.  It  is  a  great  blessing  to  the  poor  to  have  cheap  food ;  but 
greater  than  that,  prior  to  that,  and  of  still  higher  value,  is  the 
blessing  of  being  able  to  buy  food  by  honest  and  respectable  employ- 
ment. Employment  feeds,  and  clothes,  and  instructs.  Employment 
gives  health,  sobriety,  and  morals.  Constant  employment  and  well- 
paid  labor  produce,  in  a  country  like  ours,  general  prosperity,  con- 
tent, and  cheerfulness.  Thus  happy  have  we  seen  the  country. 
Thus  happy  may  we  long  continue  to  see  it. 


XX 

CLAY:   SPEECH  OF  1824' 

ACCORDING  to  the  opponents  of  the  domestic  policy,  the  pro- 
^  posed  system  will  force  capital  and  labor  inco  new  and  reluctant 
employments ;  we  are  not  prepared,  in  consequence  of  the  high  price 
of  wages,  for  the  successful  establishment  of  manufactures,  and  we 
must  fail  in  the  experiment.  We  have  seen  that  the  existing  occupa- 
tions of  our  society,  those  of  agriculture,  commerce,  navigation,  and 
the  learned  professions,  are  overflowing  with  competitors,  and  that 
the  want  of  employment  is  severely  felt.  Now  what  does  this  bill 
propose?  To  open  a  new  and  extensive  field  of  business,  in  which 
all  that  choose  may  enter.  There  is  no  compulsion  upon  any  one  to 
engage  in  it.  An  option  only  is  given  to  industry,  to  continue  in  the 
present  unprofitable  pursuits,  or  to  embark  in  a  new  and  promising 
one.  The  effect  will  be  to  lessen  the  competition  in  the  old  branches 
of  business,  and  to  multiply  our  resources  for  increasing  our  com- 
forts and  augmenting  the  national  wealth.  The  alleged  fact  of  the 
high  price  of  wages  is  not  admitted.  The  truth  is  that  no  class  of 
society  suffers  more,  in  the  present  stagnation  of  business,  than  the 
laboring  class.  That  is  a  necessary  effect  of  the  depression  of  agri- 
culture, the  principal  business  of  the  community.  The  wages  of  able- 
bodied  men  vary  from  S5  to  S8  per  month,  and  such  has  been  the 
want  of  employment,  in  some  parts  of  the  Union,  that  instances  have 
not  been  unfrequent  of  men  working  merely  for  the  means  of  present 
subsistence.  If  the  wages  for  labor  here  and  in  England  are  com- 
pared, they  will  be  found  not  to  be  essentially  different.  I  agree 
with  the  honorable  gentleman  from  Virginia,  that  high  wages  are  a 
proof  of  national  prosperity ;  we  differ  only  in  the  means  by  which 
that  desirable  end  shall  be  attained.  But,  if  the  fact  were  true, 
that  the  wages  of  labor  are  high,  I  deny  the  correctness  of  the 

1  Henry  Clay  (1777-1852),  Speech  on  American  Industry,  in  the  House  of 
Representatives,  March  30  and  31,  1824. 

517 


5i8  CLAY 

argument  founded  upon  it.  The  argument  assumes  that  natural  labor 
is  the  principal  element  in  the  business  of  manufacture.  That  was 
the  ancient  theory.  But  the  valuable  inventions  and  vast  improve- 
ments in  machinery,  which  have  been  made  within  a  few  past  years, 
have  produced  a  new  era  in  the  arts.  The  effect  of  this  change,  in 
the  powers  of  production,  may  be  estimated,  from  what  I  have  al- 
ready stated  in  relation  to  England  and  to  the  triumphs  of  European 
artificial  labor  over  the  natural  labor  of  Asia.  In  considering  the 
fitness  of  a  nation  for  the  establishment  of  manufactures,  we  must 
no  longer  limit  our  views  to  the  state  of  its  population  and  the  price 
of  wages.  All  circumstances  must  be  regarded,  of  which  that  is, 
perhaps,  the  least  important.  Capital,  ingenuity  in  the  construction 
and  adroitness  in  the  use  of  machinery,  and  the  possession  of  the 
raw  materials,  are  those  which  deserve  the  greatest  consideration. 
All  these  circumstances  (except  that  of  capital,  of  which  there  is 
no  deficiency)  exist  in  our  country  in  an  eminent  degree,  and  more 
than  counterbalance  the  disadvantage,  if  it  really  existed,  of  the 
lower  wages  of  labor  in  Great  Britain.  The  dependence  upon  foreign 
nations  for  the  raw  material  of  any  great  manufacture  has  been 
ever  considered  as  a  discouraging  fact.  The  state  of  our  population 
is  peculiarly  favorable  to  the  most  extensive  introduction  of  machin- 
ery. We  have  no  prejudices  to  combat,  no  persons  to  drive  out  of 
employment.  The  pamphlet  to  which  we  have  had  occasion  so  often 
to  refer,  in  enumerating  the  causes  which  have  brought  in  England 
their  manufactures  to  such  a  state  of  perfection,  and  which  now 
enable  them,  in  the  opinion  of  the  writer,  to  defy  all  competition, 
does  not  specify,  as  one  of  them,  low  wages.  It  assigns  three :  first, 
capital ;  secondly,  extent  and  costliness  of  machinery ;  and,  thirdly, 
steady  and  persevering  industry.  Notwithstanding  the  concurrence 
of  so  many  favorable  causes  in  our  country  for  the  introduction  of 
the  arts,  we  are  earnestly  dissuaded  from  making  the  experiment, 
and  our  ultimate  failure  is  confidently  predicted.  Why  should  we 
fail  ?  Nations,  like  men,  fail  in  nothing  which  they  boldly  attempt, 
when  sustained  by  virtuous  purpose  and  firm  resolution.  I  am  not 
willing  to  admit  this  depreciation  of  American  skill  and  enterprise. 
I  am  not  willing  to  strike  before  an  effort  is  made.  All  our  past 
history  exhorts  us  to  proceed,  and  inspires  us  with  animating  hopes 
of  success.  Past  predictions  of  our  incapacity  have  failed,  and  present 


SPEECH  OF  1824  S^Q 

predictions  will  not  be  realized.  At  the  commencement  of  this  gov- 
ernment, we  were  told  that  the  attempt  would  be  idle  to  construct 
a  marine  adequate  to  the  commerce  of  the  country,  or  even  to  the 
business  of  its  coasting  trade.  The  founders  of  our  government  did 
not  listen  to  these  discouraging  counsels ;  and — behold  the  fruits  of 
their  just  comprehension  of  our  resources  !  Our  restrictive  policy  was 
denounced,  and  it  was  foretold  that  it  would  utterly  disappoint  all  our 
expectations.'  But  our  restrictive  policy  has  been  eminently  success- 
ful ;  and  the  share  which  our  navigation  now  enjoys  in  the  trade  with 
France,  and  with  the  British  West  India  islands,  attests  its  victory. 
What  were  not  the  disheartening  predictions  of  the  opponents  of  the 
late  war  ?  Defeat,  discomfiture,  and  disgrace,  were  to  be  the  certain, 
but  not  the  worst  effect  of  it.  Here,  again,  did  prophecy  prove  false  ; 
and  the  energies  of  our  country,  and  the  valor  and  the  patriotism  of 
our  people,  carried  us  gloriously  through  the  war.  We  are  now,  and 
ever  will  be,  essentially  an  agricultural  people.  Without  a  material 
change  in  the  fixed  habits  of  the  country,  the  friends  of  this  measure 
desire  to  draw  to  it,  as  a  powerful  auxiliary  to  its  industry,  the  manu- 
facturing arts.  The  difference  between  a  nation  with  and  without  the 
arts  may  be  conceived  by  the  difference  between  a  keel-boat  and  a 
steamboat,  combating  the  rapid  torrent  of  the  Mississippi.  How 
slow  does  the  former  ascend,  hugging  the  sinuosities  of  the  shore, 
pushed  on  by  her  hardy  and  exposed  crew,  now  throwing  themselves 
in  vigorous  concert  on  their  oars,  and  then  seizing  the  pendant 
boughs  of  overhanging  trees:  she  seems  hardly  to  move;  and  her 
scanty  cargo  is  scarcely  worth  the  transportation !  With  what  ease 
is  she  not  passed  by  the  steamboat,  laden  with  the  riches  of  all 
quarters  of  the  world,  with  a  crew  of  gay,  cheerful,  and  protected 
passengers,  now  dashing  into  the  midst  of  the  current,  or  gliding 
through  the  eddies  near  the  shore !  Nature  herself  seems  to  survey 
with  astonishment  the  passing  wonder,  and,  in  silent  submission, 
reluctantly  to  own  the  magnificent  triumphs,  in  her  own  vast  domin- 
ion, of  Fulton's  immortal  genius. 


XXI 

ADAMS:   REPORT  OF  1832^ 
Home  Competition  and  Export  Tax 

THE  principal  mass  of  taxation  in  Great  Britain  is  by  excise. 
By  that  alone  she  raises  more  than  one  hundred  millions  of 
dollars  of  yearly  revenue.  The  Government  of  the  United  States 
have  resorted  to  excises  and  direct  taxes  only  upon  occasions  of 
emergency.  The  mode  of  levying  all,  or  nearly  all,  the  revenues  of 
the  Union,  by  impost  upon  articles  of  merchandise  imported  from 
abroad,  was  originally  adopted,  and  has  been  perseveringly  pursued, 
because  it  had  always  been  considered  as  a  maxim  in  statistics,  that 
duties  of  impost  were  always  paid  by  the  consumer. 

Such  is,  no  doubt,  the  first,  and  superficial  appearance  of  things. 
But  the  operation  of  all  taxation,  and  especially  of  indirect  taxation, 
is  of  a  complicated  nature  upon  the  commercial  intercourse  and 
pecuniary  concerns  of  mankind.  The  controversies  which  have  re- 
sulted from  the  introduction  and  establishment  of  what  has  been 
termed  the  American  system,  looking  to  the  protection  of  domestic 
manufactures,  have  given  rise  to  two  new  doctrines  of  political 
economy ;  one  of  them  advanced  by  the  friends,  and  one  by  the 
opponents  of  that  system ;  both,  at  first  sight,  highly  paradoxical, 
both  appearing,  upon  close  examination,  to  be  not  entirely  without 
foundation,  and  both,  in  the  ardor  of  disputation,  relied  upon,  it  is 
believed,  beyond  just  and  rational  warrant. 

The  opinion  advanced  by  the  friends  of  the  protective  system  is, 
that  the  tendency  of  aggravating  duties  of  impost  upon  articles 
imported  from  abroad,  and  holding  no  competition  with  similar 
articles  of  domestic  manufacture,  is  to  reduce,  and  not  to  increase, 
the  price  of  the  articles  themselves. 

^John  Quincy  Adams  (i 767-1848),  Report  of  the  Committee  on  Manufac- 
tures, in  the  House  of  Representatives,  May  21,  1832. 

520 


REPORT  OF  1832  52 1 

The  opinion  sustained  by  the  free  trade  party  is,  that  the  great 
mass  of  the  duties  of  impost  is  paid,  not  by  the  consumer  of  the 
dutied  articles,  but  by  the  producer  of  the  article  exported,  to  pay 
for  the  article  upon  which  the  impost  was  levied. 

The  doctrine,  that  duties  of  impost  cheapen  the  price  of  the  arti- 
cles upon  which  they  are  levied,  seems  to  conflict  with  the  first 
dictates  of  common  sense.  But  its  supporters  first  appeal  with 
confidence  to  the  fact,  that  most  of  the  articles  upon  which  additional 
duties  were  levied  by  the  tariff  of  1828,  have,  since  that  time,  con- 
siderably fallen  in  price — and  then  they  argue  that  it  must  be  so, 
by  the  excitement  of  competition  in  the  market.  It  is  certainly  con- 
trary to  the  natural  course  of  things,  that  an  addition  to  the  cost 
should  be  a  reduction  of  the  price  of  an  article.  True  it  is,  that 
the  duty  gives  a  spur  to  the  production  of  the  article  at  home.  The 
price  of  any  article  in  the  market  must  always  depend  upon  the 
relative  condition  of  the  demand  and  supply  at  the  time  and  place 
of  sale.  But  very  slight  variations  of  time,  or  place,  affect  often,  to 
a  very  great  extent,  the  relative  proportion  of  the  demand  and  supply, 
and,  consequently,  the  price  of  the  article.  No  safe  conclusion  can 
be  drawn  from  the  fact  that,  subsequent  to  the  tariff  of  1828,  the 
prices  of  the  articles  upon  which  the  duties  were  then  increased, 
have  fallen,  unless  from  other  circumstances  it  can  be  shown,  that 
the  increase  of  the  duty  was  the  cause  of  the  fall  in  price ;  nor  will 
it  be  sufficient,  to  prove  so  strange  a  paradox,  to  account  for  it  by 
the  excitement  of  competition.  Wherever  there  is  a  profitable  mar- 
ket, there  will  be  competition.  Had  the  tariff  of  1828  never  been 
enacted,  the  competition  in  our  markets  would  have  been  as  great, 
and  would  have  been  as  effectual  to  reduce  the  prices,  as  it  has  been 
with  the  aggravation  of  duties.  In  that  competition  our  own  manu- 
factures might  not  indeed  have  shared — but  it  would  have  existed 
in  all  its  force  between  those  who  furnished  the  supply,  and  could 
not  have  failed  to  reduce  the  prices  to  the  level  of  the  moderate 
profit  necessary  to  the  existence  of  the  trade. 

But  the  duty  upon  the  article  imported  from  abroad  enabled  the 
domestic  producer  to  enter  into  competition  with  the  importer  from 
abroad.  So  long  as  this  competition  continues,  the  duty  operates  as 
a  bounty  or  premium  to  the  domestic  manufacturer.  But  by  whom 
is  it  paid?    Certainly  by  the  purchaser  of  the  article,  whether  of 


52  2  ADAMS 

foreign  or  of  domestic  manufacture.  The  duty  constitutes  a  part  of 
the  price  of  the  whole  mass  of  the  article  in  the  market.  It  is  sub- 
stantially paid  upon  the  article  of  domestic  manufacture  as  well  as 
upon  that  of  foreign  production.  Upon  one  it  is  a  bounty ;  upon  the 
other  a  burden ;  and  the  repeal  of  the  tax  must  operate  as  an  equiva- 
lent reduction  of  the  price  of  the  article,  whether  foreign  or  domestic. 
We  say  so  long  as  the  importation  continues,  the  duty  must  be 
paid  by  the  purchaser  of  the  article.  Some  portion  of  it,  however,  is, 
for  a  short  interval  of  time,  paid  by  the  foreigner  against  whose  trade 
the  domestic  competitor  is  brought  forward.  It  affects  him  as  a 
reduction  of  his  profits,  which  he  endures  for  a  time,  but  under 
the  pressure  of  which  he  is  finally  compelled  to  withdraw  from  the 
market.  While  this  struggle  continues,  the  duty  is  paid  by  the 
foreigner,  or  by  the  importing  merchant  here.  The  purchaser  and 
consumer  here  are  relieved  from  the  burden  of  the  duty,  and  may 
perhaps  obtain  the  goods  cheaper  than  if  they  were  exonerated  from 
the  duty  altogether.  But  this  relief  is  purchased  by  injustice,  at 
the  expense  not  only  of  the  foreign  manufacturer,  but  of  the  import- 
ing merchant,  till  the  duty  becomes  prohibitory,  and  then  the  foreign 
manufacturer,  the  importing  merchant,  the  shipper,  the  mariner, 
and  the  whole  class  of  citizens  to  whom  the  importation  gave  occu- 
pation and  subsistence,  suffer  by  the  extinction  of  the  trade,  precisely 
to  the  same  extent  that  the  profits  of  the  domestic  manufacturer 
are  enhanced  by  the  bounty  paid  to  him  for  his  competition  with 
the  foreigner.  This  struggle,  if  the  statements  often  made  by  the 
friends  of  the  tariff  are  correct,  is  sometimes  carried  on  by  the  manu- 
facturers to  a  very  extravagant  and  desperate  extent.  It  has  even 
gravely  been  asserted,  that,  upon  the  passage  of  the  tariff  act  of 
1828,  the  British  owners  of  forges  and  furnaces  reduced  the  price 
of  their  iron  not  less  than  eight  dollars  a  ton,  to  retain  the  control 
of  the  American  market ;  an  operation  by  which,  as  has  been  shown 
by  the  memorial  of  the  Free  Trade  Convention  to  Congress,  they 
must  have  incurred  a  loss  of  near  five  millions  of  dollars  a  year,  to 
retain  the  profits  upon  yearly  sales  to  the  amount  of  perhaps  two 
hundred  and  sixty  thousand  dollars.  It  is  very  certain,  therefore,  that 
the  reduction  of  eight  dollars  a  ton  upon  the  price  of  British  iron  in 
1828,  though  contemporaneous  with  our  tariff  act,  was  in  no  wise 
connected  with  it  in  the  relation  of  cause  and  effect.    We  may,  and 


REPORT  OF  1832  523 

probably  do,  often  greatly  exaggerate  to  ourselves  the  immensity  of 
exertions  and  of  sacrifices  made  by  the  British  manufacturers  to  re- 
tain and  preserve  in  their  own  hands  the  control  of  foreign  markets. 
But  that  such  exertions  and  sacrifices  are  and  will  be  made  by  large 
manufacturing  establishments,  in  which  extensive  capitals  are  em- 
ployed, cannot  be  doubted.  Whenever  they  are  made,  and  so  long  as 
they  are  continued,  to  counteract  the  effects  of  tariff  duties  in  foreign 
countries,  the  duties  are  paid  by  them,  and  the  purchaser  of  the  goods 
in  the  foreign  country  obtains  them  freed  from  the  duty  at  the  ex- 
pense of  the  foreign  manufacturer.  But  this  career  of  losing  trade 
cannot  continue  long.  In  the  competitions  between  different  lines  of 
steamboats  and  stages,  we  have  sometimes  seen  the  rival  interests 
underbidding  each  other,  till  the  traveller  has  been  treated  gratui- 
tously with  his  fare.  But  the  result  even  of  a  very  short  contest  of 
that  nature,  proves  utterly  ruinous  to  one,  if  not  to  both  the  contend- 
ing establishments.  And  so  it  is,  and  must  be  with  any  reduction 
of  price  in  the  market  upon  articles  furnished  partly  by  importa- 
tion from  abroad,  and  partly  by  domestic  industry,  which  ensues 
upon  the  levy  of  an  additional  duty  upon  the  article  imported 
from  abroad. 

The  incidental  effect  of  competition  in  the  market,  excited  on  the 
part  of  the  domestic  manufacturer,  by  the  aggravation  of  duty  upon 
the  corresponding  article  imported  from  abroad,  to  reduce  the  price 
of  the  article,  must  be  transient  and  momentary.  The  general  and 
permanent  effect  must  be  to  increase  the  price  of  the  article  to  the 
extent  of  the  additional  duty,  and  it  is  then  paid  by  the  con- 
sumer. If  it  were  not  so — if  the  general  effect  of  adding  to  a 
duty  were  to  make  the  price  of  the  article  upon  which  it  is  levied 
less — the  converse  of  the  proposition  would  also  be  true ;  and  the 
operation  for  increasing  the  price  of  the  domestic  article  would  be 
to  repeal  the  duty  upon  the  same  article  imported — an  experiment 
which  the  friends  of  our  internal  industry  will  not  be  desirous  of 
making.  We  cannot  subscribe,  therefore,  to  the  doctrine  that  the 
duties  of  impost,  protective  of  our  own  manufactures,  are  paid  by 
the  foreign  merchant  or  manufacturer.  Nor  can  we  more  readily 
believe  that  they  are  paid  by  the  purchaser  of  the  articles  exported 
from  our  country  to  pay  for  the  importations  which  we  receive 
in  return. 


524  ADAMS 

It  is  contended  that,  by  excluding  the  foreign  manufacturer  of 
cotton  from  our  own  markets,  we  disable  him  from  purchasing  the 
raw  material  produced  in  our  own  country ;  but  if,  by  the  exclusion 
of  the  foreigner,  the  effect  of  the  duty  is  to  bring  into  the  market 
our  own  manufacturer  in  his  place,  the  market  for  the  raw  material 
is  in  no  wise  diminished ;  it  has  only  changed  its  place.  Instead  of 
shipping  his  cotton  to  Liverpool  or  Glasgow,  the  Southern  planter 
sends  it  to  Providence  or  Boston.  The  demand  for  the  article  is 
not  diminished  by  the  diminution  of  importations  from  abroad. 
Whatever  falling  off  there  may  be  of  shipping  for  foreign  mar- 
kets, is  supplied  by  the  increase  of  enrolled  tonnage  and  the  coast- 
ing trade. 

The  argument  of  the  South  has  been  sometimes  stated  in  another 
form.  It  has  been  said  that  the  portion  of  the  impost  duties  paid 
by  the  inhabitants  of  the  Northern  and  manufacturing  States,  in- 
stead of  being  burdensome,  is  actually  profitable  to  them.  That, 
to  the  manufacturing  interests  themselves,  instead  of  its  being  a  tax, 
it  is  a  bounty,  or  gratuitous  donation  to  them  by  the  nation,  made  at 
the  expense  of  those  portions  of  the  Union  where  there  are  no  manu- 
facturing establishments.  A  contrasted  view  is  taken  of  the  popula- 
tion, soil,  and  climate  of  the  northern  and  southern  sections  of  the 
Union.  In  the  North,  it  is  said,  the  climate  is  rugged — the  soil 
barren — the  whole  population  white  and  free.  The  land  will  not 
feed  its  inhabitants.  They  are  driven  by  necessity  to  the  ocean,  to 
the  wilderness,  or  to  the  establishment  of  manufactures.  These  are 
their  only  resources  for  arresting  the  tide  of  emigration.  In  the 
South,  the  climate  is  mild  and  genial,  the  soil  fertile,  and  the  popu- 
lation divided  in  nearly  equal  numbers  into  black  and  white — 
masters  and  slaves.  The  cultivation  of  the  land  is  performed  by  the 
colored  population.  The  planter  cannot  change  his  occupation.  He 
is  rooted  to  the  soil.  Manufactures  cannot  be  established,  because 
slaves  are  both  morally  and  physically  disabled  from  working  in 
them.  They  are,  besides,  very  apt  to  set  fire  to  the  buildings,  as 
the  experience  of  certain  Yankees  has  taught  them,  who,  in  defiance 
of  the  laws  of  nature,  did  recently  attempt  to  set  up  some  manu- 
facture in  the  neighborhood  of  Charleston.  The  duties  levied  then 
upon  articles  of  foreign  manufacture,  for  the  protection  of  domestic 
industry,    must    therefore   always    operate    to    the    benefit    of    the 


REPOKT  OF  1832  52$ 

Northern,  and  to  the  injury  of  the  Southern  section  of  the  Union. 
They  are  irreconcilable  interests  ;  and  the  planter  of  the  South  cannot 
and  will  not  submit  to  the  sacrifice  of  his  interest  for  the  benefit  of 
the  Northern  manufacturer,  for  that  would  reduce  him  to  a  state  of 
colonial  vassalage. 

This  argument  is  approached  with  painful  reluctance.  It  is  be- 
lieved to  be  here  candidly  stated,  and  as  it  has  been,  time  after  time, 
repeated,  by  some  of  the  ablest  and  most  intelligent  statesmen  of 
the  South ;  and  as  it  is  believed  to  contain  the  whole  substance  of 
the  Southern  argument  against  the  protective  system,  it  will  be 
proper  to  examine  it  in  the  spirit  of  candor  and  of  kindness,  dictated 
no  less  by  a  feeling  of  sympathy  for  our  brethren  and  countrymen, 
than  by  an  anxious  solicitude  for  the  preservation  of  the  Union. 

The  first  remark  which  obtrudes  itself  upon  the  statement  of  this 
argument  is,  that  it  strikes  directly  at  the  heart  of  the  Union  itself. 
It  presents  two  great,  transcendent,  opposite,  and  irreconcilable 
interests,  in  deadly  hostility  to  each  other ;  each  pervading  the  two 
great  Atlantic  sections  of  the  country,  each  operating  within  its 
appropriate  domain,  with  the  irresistible  force  of  a  law  of  nature, 
and  leading  to  the  fatal  and  unavoidable  conclusion  that  between 
two  large  masses  of  mankind,  thus  situated  in  natural  conflict  with 
each  other,  no  bond  of  union  under  one  and  the  same  government, 
even  partaking  of  a  federal  character,  can  be  maintained.  It  will 
be  doing  no  injustice  to  more  than  one  distinguished  and  influential 
statesman  of  the  South  to  affirm,  that  his  mind  has  been  made  up 
to  this  result.  Nor  is  it  possible  to  observe  the  political  movements 
in  progress  at  this  time  in  the  part  of  the  country  where  the  excite- 
ment against  the  protective  system  principally  prevails,  without 
believing  that  the  effort  of  the  leading  spirits  among  them  is  to  turn 
the  current  of  popular  sentiment  to  that  conclusion: — to  calculate 
the  value  of  the  Union. 

But  if  this  high  ground  is  taken  in  one  quarter  of  the  common 
country,  what  choice  or  alternative  is  left  to  the  other?  The  South, 
in  the  person  of  her  champion,  says — I  am  a  planter  and  cultivate 
my  land  by  slaves — I  cannot  quit  the  soil — I  cannot  change  my 
occupation — my  slaves  are  my  subsistence,  as  well  as  my  property, 
and  they  cannot  be  made  to  work  at  manufactures — my  first  want 
is  to  sell  my  crop,  as  dear  as  possible,  and  my  second,  to  buy 


52  6  ADAMS 

manufactured  articles  as  cheap  as  possible  in  return.  All  protection 
of  domestic  manufactures,  by  duties  levied  upon  those  of  my  cus- 
tomers, who  purchase  my  plantation's  produce,  and  work  it  up  into 
manufactured  articles  for  my  use,  is  an  invasion  of  my  rights,  a  de- 
predation upon  my  property— I  cannot  manufacture  myself,  and  I 
will  not  suffer  you  to  manufacture  for  me :  I  prefer  to  purchase  the 
fabric  from  the  foreigner,  to  whom  I  supply  the  raw  material.  Man- 
ufactures are  necessary  for  your  subsistence,  because  you  have  a 
cold  climate,  a  barren  soil,  and  no  slaves ;  but  I  will  not  bear  a  tax 
upon  the  negro  cloths  of  Manchester,  to  enable  you  to  supply  me 
the  same  article  equally  cheap,  because  your  gain  must  be  my  loss, 
and  because  your  prosperity  must,  in  the  nature  of  things,  be 
incompatible  with  mine. 

In  this  view  of  the  subject,  the  interest  of  the  South  is  identified 
with  that  of  the  foreign  rival  and  competitor  of  the  Northern  manu- 
facturer, against  him ;  and  for  his  ruin,  the  Southern  planter  and  the 
British  manufacturer  are  colleagued.  How  strange  the  association ! 
How  deeply  it  conflicts  with  the  whole  history  of  our  revolutionary 
war !    What  a  satire  it  speaks  upon  all  our  institutions  ! 

It  cannot  be  true.  There  are  theories  in  politics  and  morals,  as 
well  as  in  the  science  of  mind,  the  fallacy  of  which  is  far  more 
easily  detected  in  the  absurdity  of  the  conclusions  at  which  they 
arrive,  than  in  the  process  of  reason  by  which  they  travel.  When 
Mandeville,  by  a  commentary  upon  the  fable  of  the  bees,  undertook 
to  prove  that  private  vices  were  public  benefits,  he  made  an  in- 
genious book,  which  has,  perhaps,  never  been  very  satisfactorily 
answered,  but  to  the  conclusions  of  which  no  man  of  correct  moral 
feeling  can  assent.  When  Berkeley,  from  the  deepest  recesses  of 
philosophy,  raised  an  argument  to  prove  that  mind  has  no  conclusive 
evidence  of  the  existence  of  matter,  he  was  said  to  have  demon- 
strated, beyond  all  possibility  of  reply,  that  which  no  man  in  his 
senses  could  believe.  When  we  are  told  that  the  cotton  planter  of 
the  South,  and  the  manufacturer  of  Pennsylvania,  or  of  New  Eng- 
land, have  interests  so  diametrically  and  irreconcilably  opposite  to 
each  other,  that  they  cannot  remain  permanently  associated  as  mem- 
bers of  the  same  community,  we  answer,  in  the  language  of  the 
Roman  moralist  and  poet,  '' Incredulus  odi."  We  disbelieve,  and 
we  hate  a  doctrine  which  appears  to  us  to  contain,  in  itself,  a  satire 


REPORT  OF  1832  527 

upon  human  nature ;  or,  at  least,  to  solve  itself  into  that  melancholy 
and  exploded  theory  of  Hobbes,  that  the  state  of  nature,  between 
man  and  man,  is  a  state  of  war.  For  were  it  true  that  the  interests 
of  the  planter  and  the  manufacturer  were  irreconcilable  with  each 
other,  as  members  of  the  same  community,  what  must  be  the  neces- 
sary and  unavoidable  consequence  of  the  dissolution  of  the  tie  be- 
tween them  as  fellow  citizens,  represented  in  the  same  legislative 
assemblies,  authorized  to  enact  laws  binding  upon  them  both?  For, 
suppose  that  common  tie  to  be  dissolved,  and  what  would  be  the 
relation  then  subsisting  between  them?  They  would  remain  in  the 
same  relative  geographical  position  to  each  other,  each  still  employed 
in  the  same  occupations,  and  with  the  same  irreconcilable  and  oppo- 
site interests,  without  that  link  of  union  between  them,  which  had 
existed  by  their  representation  in  one  common  legislature ;  with  the 
impulse  of  mutual  repulsion,  aggravated  by  their  separation,  and 
with  all  the  principles  of  attraction  dissolved,  and  vanished  into 
air.  Could  it  be  otherwise,  than  that  the  irreconcilable  and  opposite 
interests  should  speedily  fret  and  kindle  into  war,  and  then  how 
would  their  relations  stand  ?  Must  not  the  weaker  party,  on  which 
side  soever  it  might  fall,  fly  for  assistance  to  a  foreign  power? 
Nay,  are  there  not  elements  in  the  very  nature  of  the  contest  itself, 
which  must  drive  the  planter  nation,  severed  from  their  present 
associates,  to  Great  Britain  for  alliance,  and  would  not  that  alliance 
be  but  another  name  for  protection  ?  Must  not  recolonization  prove 
the  inevitable  doom  of  that  nation  so  constituted  and  so  neighbored  ? 
And  what  next?  The  irreconcilable  and  opposite  interests  remain 
in  all  their  force,  and  with  redoubled  aggravation.  War,  inextin- 
guishable, or  exterminating  war,  between  the  brothers  of  this  severed 
continent,  and  a  foreign  umpire  to  perpetuate,  or  to  adjust  their 
strife,  not  according  to  the  interests  of  either  of  the  parties,  but 
according  to  her  own. 


XXII 

CLEVELAND:  MESSAGE  OF  1887^ 
To  the  Congress  of  the  United  States: 

YOU  are  confronted  at  the  threshold  of  your  legislative  duties, 
with  a  condition  of  the  national  finances  which  imperatively 
demands  immediate  and  careful  consideration. 

The  amount  of  money  annually  exacted,  through  the  operation  of 
present  laws,  from  the  industries  and  necessities  of  the  people,  largely 
exceeds  the  sum  necessary  to  meet  the  expenses  of  the  Government. 

When  we  consider  that  the  theory  of  our  institutions  guarantees  to 
every  citizen  the  full  enjoyment  of  all  the  fruits  of  his  industry  and 
enterprise,  with  only  such  deduction  as  may  be  his  share  towards 
the  careful  and  economical  maintenance  of  the  Government  which 
protects  him,  it  is  plain  that  the  exaction  of  more  than  this  is  inde- 
fensible extortion,  and  a  culpable  betrayal  of  American  fairness  and 
justice.  This  wrong  inflicted  upon  those  who  bear  the  burden  of 
national  taxation,  like  other  wrongs,  multiplies  a  brood  of  evil  conse- 
quences. The  public  treasury,  which  should  only  exist  as  a  conduit 
conveying  the  people's  tribute  to  its  legitimate  objects  of  expenditure, 
becomes  a  hoarding-place  for  money  needlessly  withdrawn  from  trade 
and  the  people's  use,  thus  crippling  our  national  energies,  suspending 
our  country's  development,  preventing  investment  in  productive 
enterprise,  threatening  financial  disturbance,  and  inviting  schemes 
of  public  plunder. 

This  condition  of  our  treasury  is  not  altogether  new ;  and  it  has 
more  than  once  of  late  been  submitted  to  the  people's  representatives 
in  the  Congress,  who  alone  can  apply  a  remedy.  And  yet  the  situa- 
tion still  continues,  with  aggravated  incidents,  more  than  ever  presag- 
ing financial  convulsion  and  wide-spread  disaster. 


^Grover  Cleveland  (1837-1908),  Message  to  Congress  of  December  6,  18S7. 

528 


MESSAGE  OF  1887 


529 


Our  scheme  of  taxation,  by  means  of  which  this  needless  surplus 
is  taken  from  the  people  and  put  into  the  public  treasury,  consists 
of  a  tariff  or  duty  levied  upon  importations  from  abroad  and  internal- 
revenue  taxes  levied  upon  the  consumption  of  tobacco  and  spirituous 
and  malt  liquors.  It  must  be  conceded  that  none  of  the  things  sub- 
jected to  internal-revenue  taxation  are,  strictly  speaking,  necessaries ; 
there  appears  to  be  no  just  complaint  of  this  taxation  by  the  con- 
sumers of  these  articles,  and  there  seems  to  be  nothing  so  well  able 
to  bear  the  burden  without  hardship  to  any  portion  of  the  people. 

But  our  present  tariff  laws,  the  vicious,  inequitable,  and  illogical 
source  of  unnecessary  taxation,  ought  to  be  at  once  revised  and 
amended.  These  laws,  as  their  primary  and  plain  effect,  raise  the 
price  to  consumers  of  all  articles  imported  and  subject  to  duty,  by 
precisely  the  sum  paid  for  such  duties.  Thus  the  amount  of  the 
duty  measures  the  tax  paid  by  those  who  purchase  for  use  these 
imported  articles.  Many  of  these  things,  however,  are  raised  or 
manufactured  in  our  own  country,  and  the  duties  now  levied  upon 
foreign  goods  and  products  are  called  protection  to  these  home  manu- 
factures, because  they  render  it  possible  for  those  of  our  people  who 
are  manufacturers,  to  make  these  taxed  articles  and  sell  them  for  a 
price  equal  to  that  demanded  for  the  imported  goods  that  have  paid 
customs  duty.  So  it  happens  that  while  comparatively  a  few  use 
the  imported  articles,  millions  of  our  people,  who  never  use  and  never 
saw  any  of  the  foreign  products,  purchase  and  use  things  of  the 
same  kind  made  in  this  country,  and  pay  therefor  nearly  or  quite 
the  same  enhanced  price  which  the  duty  adds  to  the  imported  arti- 
cles. Those  who  buy  imports  pay  the  duty  charged  thereon  into  the 
public  treasury,  but  the  great  majority  of  our  citizens,  who  buy 
domestic  articles  of  the  same  class,  pay  a  sum  at  least  approximately 
equal  to  this  duty  to  the  home  manufacturer.  This  reference  to  the 
operation  of  our  tariff  laws  is  not  made  by  way  of  instruction,  but  in 
order  that  we  may  be  constantly  reminded  of  the  manner  in  which 
they  impose  a  burden  upon  those  who  consume  domestic  products 
as  well  as  those  who  consume  imported  articles,  and  thus  create  a 
tax  upon  all  our  people. 

It  is  not  proposed  to  entirely  relieve  the  country  of  taxation.  It 
must  be  extensively  continued  as  the  source  of  the  Government's 
income ;  and  in  a  readjustment  of  our  tariff  the  interests  of  American 


530  CLEVELAND 

labor  engaged  in  manufacture  should  be  carefully  considered,  as 
well  as  the  preservation  of  our  manufacturers.  It  may  be  called 
protection,  or  by  any  other  name,  but  relief  from  the  hardships  and 
dangers  of  our  present  tariff  laws,  should  be  devised  with  especial 
precaution  against  imperiling  the  existence  of  our  manufacturing 
interests.  But  this  existence  should  not  mean  a  condition  which, 
without  regard  to  the  public  welfare  or  a  national  exigency,  must 
always  insure  the  realization  of  immense  profits  instead  of  moder- 
ately profitable  returns.  As  the  volume  and  diversity  of  our  national 
activities  increase,  new  recruits  are  added  to  those  who  desire  a  con- 
tinuation of  the  advantages  which  they  conceive  the  present  system 
of  tariff  taxation  directly  affords  them.  So  stubbornly  have  all 
efforts  to  reform  the  present  condition  been  resisted  by  those  of  our 
fellow-citizens  thus  engaged,  that  they  can  hardly  complain  of  the 
suspicion,  entertained  to  a  certain  extent,  that  there  exists  an  organ- 
ized combination  all  along  the  line  to  maintain  their  advantage. 

We  are  in  the  midst  of  centennial  celebrations,  and  with  becom- 
ing pride  we  rejoice  in  American  skill  and  ingenuity,  in  American 
energy  and  enterprise,  and  in  the  wonderful  natural  advantages  and 
resources  developed  by  a  century's  national  growth.  Yet  when  an 
attempt  is  made  to  justify  a  scheme  which  permits  a  tax  to  be  laid 
upon  every  consumer  in  the  land  for  the  benefit  of  our  manufac- 
turers, quite  beyond  a  reasonable  demand  for  governmental  regard, 
it  suits  the  purposes  of  advocacy  to  call  our  manufactures  infant 
industries,  still  needing  the  highest  and  greatest  degree  of  favor  and 
fostering  care  that  can  be  wrung  from  Federal  legislation. 

It  is  also  said  that  the  increase  in  the  price  of  domestic  manufac- 
tures resulting  from  the  present  tariff  is  necessary  in  order  that 
higher  wages  may  be  paid  to  our  workingmen  employed  in  manu- 
factories, than  are  paid  for  what  is  called  the  pauper  labor  of 
Europe.  All  will  acknowledge  the  force  of  an  argument  which  in- 
volves the  welfare  and  liberal  compensation  of  our  laboring  people. 
Our  labor  is  honorable  in  the  eyes  of  every  American  citizen ;  and 
as  it  lies  at  the  foundation  of  our  development  and  progress,  it  is 
entitled,  without  affectation  or  hypocrisy,  to  the  utmost  regard.  The 
standard  of  our  laborers'  life  should  not  be  measured  by  that  of 
any  other  country  less  favored,  and  they  are  entitled  to  their  full 
share  of  all  our  advantages. 


MESSAGE  OF  1887  531 

By  the  last  census  it  is  made  to  appear  that  of  the  17,392,099  of 
our  population  engaged  in  all  kinds  of  industries  .  .  .  3,837,112 
are  classed  as  employed  in  manufacturing  and  mining. 

For  present  purposes,  however,  the  last  number  given  should  be 
considerably  reduced.  Without  attempting  to  enumerate  all,  it  will 
be  conceded  that  there  should  be  deducted  from  those  which  it  in- 
cludes 375,413  carpenters  and  joiners,  285,401  milliners,  dress- 
makers, and  seamstresses,  172,726  blacksmiths,  133,576  tailors  and 
tailoresses,  102,473  masons,  76,241  butchers,  41,309  bakers,  22,083 
plasterers,  and  4,891  engaged  in  manufacturing  agricultural  imple- 
ments, amounting  in  the  aggregate  to  1,214,023,  leaving  2,623,089 
persons  employed  in  such  manufacturing  industries  as  are  claimed 
to  be  benefited  by  a  high  tariff. 

To  these  the  appeal  is  made  to  save  their  employment  and  main- 
tain their  wages  by  resisting  a  change.  There  should  be  no  disposi- 
tion to  answer  such  suggestions  by  the  allegation  that  they  are  in  a 
minority  among  those  who  labor,  and  therefore  should  forego  an 
advantage,  in  the  interest  of  low  prices  for  the  majority ;  their 
compensation,  as  it  may  be  affected  by  the  operation  of  tariff  laws, 
should  at  all  times  be  scrupulously  kept  in  view ;  and  yet  with 
slight  reflection  they  will  not  overlook  the  fact  that  they  are  con- 
sumers with  the  rest ;  that  they,  too,  have  their  own  wants  and  those 
of  their  families  to  supply  from  their  earnings,  and  that  the  price  of 
the  necessaries  of  life,  as  well  as  the  amount  of  their  wages,  will 
regulate  the  measure  of  their  welfare  and  comfort. 

But  the  reduction  of  taxation  demanded  should  be  so  measured  as 
not  to  necessitate  or  justify  either  the  loss  of  employment  by  the 
working  man  nor  the  lessening  of  his  wages ;  and  the  profits  still 
remaining  to  the  manufacturer,  after  a  necessary  readjustment, 
should  furnish  no  excuse  for  the  sacrifice  of  the  interests  of  his 
employes  either  in  their  opportunity  to  work  or  in  the  diminution 
of  their  compensation.  Nor  can  the  worker  in  manufactures  fail  to 
understand  that  while  a  high  tariff  is  claimed  to  be  necessary  to  allow 
the  payment  of  remunerative  wages,  it  certainly  results  in  a  very  large 
increase  in  the  price  of  nearly  all  sorts  of  manufactures,  which,  in 
almost  countless  forms,  he  needs  for  the  use  of  himself  and  his 
family.  He  receives  at  the  desk  of  his  employer  his  wages,  and 
perhaps  before  he  reaches  his  home  is  obliged,  in  a  purchase  for 


532  CLEVELAND 

family  use  of  an  article  which  embraces  his  own  labor,  to  return  in 
the  payment  of  the  increase  in  price  which  the  tariff  permits,  the 
hard-earned  compensation  of  many  days  of  toil. 

The  farmer  and  the  agriculturist  who  manufacture  nothing,  but 
who  pay  the  increased  price  which  the  tariff  imposes,  upon  every 
agricultural  implement,  upon  all  he  wears  and  upon  all  he  uses  and 
owns,  except  the  increase  of  his  flocks  and  herds  and  such  things 
as  his  husbandry  produces  from  the  soil,  is  invited  to  aid  in  main- 
taining the  present  situation ;  and  he  is  told  that  a  high  duty  on 
imported  wool  is  necessary  for  the  benefit  of  those  who  have  sheep 
to  shear,  in  order  that  the  price  of  their  wool  may  be  increased. 
They  of  course  are  not  reminded  that  the  farmer  who  has  no  sheep 
is  by  this  scheme  obliged,  in  his  purchases  of  clothing  and  woolen 
goods,  to  pay  a  tribute  to  his  fellow  farmer  as  well  as  to  the  manu- 
facturer and  merchant ;  nor  is  any  mention  made  of  the  fact  that 
the  sheep-owners  themselves  and  their  households,  must  wear  cloth- 
ing and  use  other  articles  manufactured  from  the  wool  they  sell  at 
tariff  prices,  and  thus  as  consumers  must  return  their  share  of  this 
increased  price  to  the  tradesman. 

I  think  it  may  be  fairly  assumed  that  a  large  proportion  of  the 
sheep  owned  by  the  farmers  throughout  the  country  are  found  in 
small  flocks  numbering  from  twenty-five  to  fifty.  The  duty  on  the 
grade  of  imported  wool  which  these  sheep  yield,  is  ten  cents  each 
pound  if  of  the  value  of  thirty  cents  or  less,  and  twelve  cents  if  of  the 
value  of  more  than  thirty  cents.  If  the  liberal  estimate  of  six  pounds 
be  allowed  for  each  fleece,  the  duty  thereon  would  be  sixty  or  seventy- 
two  cents,  and  this  may  be  taken  as  the  utmost  enhancement  of  its 
price  to  the  farmer  by  reason  of  this  duty.  Eighteen  dollars  would 
thus  represent  the  increased  price  of  the  wool  from  twenty-five  sheep 
and  thirty-six  dollars  that  from  the  wool  of  fifty  sheep ;  and  at 
present  values  this  addition  would  amount  to  about  one-third  of  its 
price.  If  upon  its  sale  the  farmer  receives  this  or  a  less  tariff  profit, 
the  wool  leaves  his  hands  charged  with  precisely  that  sum,  which  in 
all  its  changes  will  adhere  to  it,  until  it  reaches  the  consumer.  When 
manufactured  into  cloth  and  other  goods  and  material  for  use,  its 
cost  is  not  only  increased  to  the  extent  of  the  farmer's  tariff  profit, 
but  a  further  sum  has  been  added  for  the  benefit  of  the  manu- 
facturer under  the  operation  of  other  tariff  laws.    In  the  mean  time 


MESSAGE  OF  1887  533 

the  day  arrives  when  the  farmer  finds  it  necessary  to  purchase  woolen 
goods  and  material  to  clothe  himself  and  family  for  the  winter. 
When  he  faces  the  tradesman  for  that  purpose  he  discovers  that  he 
is  obliged  not  only  to  return  in  the  way  of  increased  prices,  his  tariff 
profit  on  the  wool  he  sold,  and  which  then  perhaps  lies  before  him 
in  manufactured  form,  but  that  he  must  add  a  considerable  sum 
thereto  to  meet  a  further  increase  in  cost  caused  by  a  tariff  duty 
on  the  manufacture.  Thus  in  the  end  he  is  aroused  to  the  fact  that 
he  has  paid  upon  a  moderate  purchase,  as  a  result  of  the  tariff 
scheme,  which,  when  he  sold  his  wool  seemed  so  profitable,  an  in- 
crease in  price  more  than  sufficient  to  sweep  away  all  the  tariff  profit 
he  received  upon  the  wool  he  produced  and  sold. 

When  the  number  of  farmers  engaged  in  wool-raising  is  compared 
with  all  the  farmers  in  the  country,  and  the  small  proportion  they 
bear  to  our  population  is  considered ;  when  it  is  made  apparent  that, 
in  the  case  of  a  large  part  of  those  who  own  sheep,  the  benefit  of  the 
present  tariff  on  wool  is  illusory ;  and,  above  all,  when  it  must  be 
conceded  that  the  increase  of  the  cost  of  living  caused  by  such 
tariff,  becomes  a  burden  upon  those  with  moderate  means  and  the 
poor,  the  employed  and  unemployed,  the  sick  and  well,  and  the 
young  and  old,  and  that  it  constitutes  a  tax  which,  with  relentless 
grasp,  is  fastened  upon  the  clothing  of  every  man,  woman,  and  child 
in  the  land,  reasons  are  suggested  why  the  removal  or  reduction  of 
this  duty  should  be  included  in  a  revision  of  our  tariff  laws. 

In  speaking  of  the  increased  cost  to  the  consumer  of  our  home 
manufactures,  resulting  from  a  duty  laid  upon  imported  articles  of 
the  same  description,  the  fact  is  not  overlooked  that  competition 
among  our  domestic  producers  sometimes  has  the  effect  of  keeping 
the  price  of  their  products  below  the  highest  limit  allowed  by  such 
duty.  But  it  is  notorious  that  this  competition  is  too  often  strangled 
by  combinations  quite  prevalent  at  this  time,  and  frequently  called 
trusts,  which  have  for  their  object  the  regulation  of  the  supply  and 
price  of  commodities  made  and  sold  by  members  of  the  combination. 
The  people  can  hardly  hope  for  any  consideration  in  the  operation 
of  these  selfish  schemes. 

If,  however,  in  the  absence  of  such  combination,  a  healthy  and 
free  competition  reduces  the  price  of  any  particular  dutiable  article 
of  home  production,  below  the  limit  which  it  might  otherwise  reach 


534  CLEVELAND 

under  our  tariff  laws,  and  if,  with  such  reduced  price,  its  manufac- 
ture continues  to  thrive,  it  is  entirely  evident  that  one  thing  has 
been  discovered  which  should  be  carefully  scrutinized  in  an  effort 
to  reduce  taxation. 

The  necessity  of  combination  to  maintain  the  price  of  any  com- 
modity to  the  tariff  point,  furnishes  proof  that  some  one  is  willing 
to  accept  lower  prices  for  such  commodity,  and  that  such  prices  are 
remunerative;  and  lower  prices  produced  by  competition  prove  the 
same  thing.  Thus  where  either  of  these  conditions  exist,  a  case 
would  seem  to  be  presented  for  an  easy  reduction  of  taxation. 
*********** 

The  difficulty  attending  a  wide  and  fair  revision  of  our  tariff  laws 
is  not  underestimated.  It  will  require  on  the  part  of  the  Congress 
great  labor  and  care,  and  especially  a  broad  and  national  contem- 
plation of  the  subject,  and  a  patriotic  disregard  of  such  local  and 
selfish  claims  as  are  unreasonable  and  reckless  of  the  welfare  of 

the  entire  country. 

*         *         *         *         *         **         *         *         *         * 

The  radical  reduction  of  the  duties  imposed  upon  raw  material 
used  in  manufactures,  or  its  free  importation,  is  of  course  an  impor- 
tant factor  in  any  effort  to  reduce  the  price  of  these  necessaries ; 
it  would  not  only  relieve  them  from  the  increased  cost  caused  by 
the  tariff  on  such  material,  but  the  manufactured  product  being 
thus  cheapened,  that  part  of  the  tariff  now  laid  upon  such  product, 
as  a  compensation  to  our  manufacturers  for  the  present  price  of 
raw  material,  could  be  accordingly  modified.  Such  reduction,  or 
free  importation,  would  serve  beside  to  largely  reduce  the  revenue. 
It  is  not  apparent  how  such  a  change  can  have  any  injurious  effect 
upon  our  manufacturers.  On  the  contrary,  it  would  appear  to  give 
them  a  better  chance  in  foreign  markets  with  the  manufacturers  of 
other  countries,  who  cheapen  their  wares  by  free  material.  Thus  our 
people  might  have  the  opportunity  of  extending  their  sales  beyond 
the  limits  of  home  consumption — saving  them  from  the  depression, 
interruption  in  business,  and  loss  caused  by  a  glutted  domestic 
market,  and  affording  their  employes  more  certain  and  steady  labor, 
with  its  resulting  quiet  and  contentment.  .  .  . 

Our  progress  toward  a  wise  conclusion  will  not  be  improved  by 
dwelling  upon  the  theories  of  protection  and  free  trade.    This  savors 


MESSAGE  OF  1887  535 

too  much  of  bandying  epithets.  It  is  a  condition  which  confronts  us 
— not  a  theory.  Relief  from  this  condition  may  involve  a  slight 
reduction  of  the  advantages  which  we  award  our  home  productions, 
but  the  entire  withdrawal  of  such  advantages  should  not  be  contem- 
plated. The  question  of  free  trade  is  absolutely  irrelevant ;  and  the 
persistent  claim  made  in  certain  quarters,  that  all  efforts  to  relieve 
the  people  from  unjust  and  unnecessary  taxation  are  schemes  of 
so-called  free-traders,  is  mischievous  and  far  removed  from  any 
consideration  for  the  public  good. 

The  simple  and  plain  duty  which  we  owe  the  people  is  to  reduce 
taxation  to  the  necessary  expenses  of  an  economical  operation  of  the 
Government,  and  to  restore  to  the  business  of  the  country  the  money 
which  we  hold  in  the  Treasury  through  the  perversion  of  govern- 
mental powers.  These  things  can  and  should  be  done  with  safety 
to  all  our  industries,  without  danger  to  the  opportunity  for  remuner- 
ative labor  which  our  workingmen  need,  and  with  benefit  to  them 
and  all  our  people,  by  cheapening  their  means  of  subsistence  and 
increasing  the  measure  of  their  comforts. 


XXIII 

Mckinley  :  speech  on  the  mills  bill^ 

What  is  a  Revenue  Tariff  ? 

THIS  brings  us  face  to  face,  therefore,  with  the  two  opposing 
systems,  that  of  a  revenue  as  distinguished  from  a  protective 
tariff,  and  upon  their  respective  merits  they  must  stand  or  fall. 
Now,  what  are  they?  First,  what  is  a  revenue  tariff?  Upon  what 
principle  does  it  rest  ?  It  is  a  tariff  or  tax  placed  upon  such  articles 
of  foreign  production  imported  here  as  will  produce  the  largest  rev- 
enue with  the  smallest  tax ;  or,  as  Robert  J.  Walker,  late  Secretary 
of  the  Treasury  and  author  of  the  tariff  of  1846,  from  whom  the 
advocates  of  the  measure  draw  their  inspiration,  put  it : 

"The  only  true  maxim  is  that  which  experience  demonstrates 
will  bring  in  each  case  the  largest  revenue  at  the  lowest  rate  of  duty, 
and  that  no  duty  be  imposed  upon  any  article  above  the  lowest 
rate  which  will  yield  the  largest  amount  of  revenue.  The  revenue 
(said  Mr.  Walker)  from  ad  valorem  duties  last  year  (1845)  ex- 
ceeded that  realized  from  specific  duties,  although  the  average  of  the 
ad  valorem  duties  was  only  23.57  P^r  cent,  and  the  average  of  the 
specific  duties  41.30  per  cent.,  presenting  another  strong  proof  that 
the  lower  duties  increase  the  revenue." 

To  secure  larger  revenue  from  lower  duties  necessitates  largely 
increased  importations,  and  if  these  compete  with  domestic  products 
the  latter  must  be  diminished  or  find  other  and  distant  and  I  may 
say  impossible  markets  or  get  out  of  the  way  altogether.  A  genuine 
revenue  tariff  imposes  no  tax  upon  foreign  importations  the  like  of 
which  are  produced  at  home,  or,  if  produced  at  home,  in  quantities 
not  capable  of  supplying  the  home  consumption,  in  which  case  it  may 
be  truthfully  said  the  tax  is  added  to  the  foreign  cost  and  is  paid  by 
the  consumer. 

1  William  McKinley  (i  843-1 901),  Speech  on  the  Mills  Bill,  in  the  House  of 
Representatives,  May  i8,  1888. 

536 


SPEECH  ON  THE  MILLS  BILL  537 

A  revenue  tariff  seeks  out  those  articles  which  domestic  produc- 
tion can  not  supply,  or  only  inadequately  supply,  and  which  the 
wants  of  our  people  demand,  and  imposes  the  duty  upon  them,  and 
permits  as  far  as  possible  the  competing  foreign  product  to  be  im- 
ported free  of  duty.  This  principle  is  made  conspicuous  in  the  bill 
under  consideration ;  for  example,  wool,  a  competing  foreign  prod- 
uct, which  our  own  flock-masters  can  fully  supply  for  domestic 
wants,  is  put  upon  the  free  list,  while  sugar,  with  a  home  product  of 
only  one-eleventh  of  the  home  consumption,  is  left  dutiable. 

Any  tax  levied  upon  a  foreign  product  which  is  a  necessity  to  our 
people,  and  which  we  can  not  fully  supply,  will  produce  revenue  in 
amount  only  measured  by  our  necessities  and  ability  to  buy.  In  a 
word,  foreign  productions  not  competing  with  home  productions  are 
the  proper  subjects  for  taxation  under  a  revenue  tariff,  and  in  case 
these  do  not  furnish  the  requisite  revenue  a  low  duty  is  put  upon 
the  foreign  product  competing  with  the  domestic  one — low  enough 
to  encourage  and  stimulate  importations,  and  low  enough  to  break 
down  eventually  domestic  competition.  For  example,  the  duty  pro- 
posed under  this  bill  upon  cotton  bagging  will  extinguish  the  industry 
here,  and  under  its  provisions  we  would  import  all  of  that  product 
from  Calcutta  and  Dundee.  A  large  revenue  would  come  from  this 
source,  because  the  foreign  would  take  the  place  of  the  domestic 
production.  This  duty  is  a  revenue  one,  and  gives  no  protection 
whatever  to  the  home  producer.  If  it  did  it  would  not  be  a  revenue 
tariff.  As  the  Cobden  school  of  political  science  puts  it,  "The 
moment  it  is  made  clear  that  a  tax  is  a  benefit  to  home  producers 
then  the  free-trade  dogma  condemns  it.  The  test  is  simple  and 
easy  of  application.  Free-trade  or  a  revenue  tariff  does  not  allow 
any  import  duties  being  imposed  on  such  articles  as  are  likewise 
produced  at  home."  Or  if  produced  at  home  a  revenue  tariff 
would  soon  destroy  their  production. 

What  is  a  Protective  Tariff  ? 

What  is  a  protective  tariff?  It  is  a_.tariff  upon  imports  so  ad- 
justed as  to  secure  the  necessary  revenue,  and  judiciously  imposed 
upon  those  foreign  products  the  like  of  which  are  produced  at  home 
orJJtie  like  of  which  we  are  capable  of  producing  at  home.    It  imposes 


538  McKINLEY 

the  duty  upon  the  competing  foreign  product ;  it  makes  it  bear 
the  burden  or  duty,  and,  as  far  as  possible,  luxuries  only  excepted, 
permits  the  non-competing  foreign  product  to  come  in  free  of  duty. 
Articles  of  common  use,  comfort,  and  necessity  which  we  can  not 
produce  here  it  sends  to  the  people  untaxed  and  free  from  custom- 
house exactions.  Tea,  coffee,  spices,  and  drugs  are  such  articles,  and 
under  our  system  are  upon  the  free  list.  It  says  to  our  foreign  com- 
petitor, If  you  want  to  bring  your  merchandise  here,  your  farm 
products  here,  your  coal  and  iron  ore,  your  wool,  your  salt,  your 
pottery,  your  glass,  your  cottons  and  woolens,  and  sell  alongside  of 
our  producers  in  our  markets,  we  will  make  your  product  bear  a 
duty ;  in  effect,  pay  for  the  privilege  of  doing  it.  Our  kind  of  a 
tariff  makes  the  competing  foreign  article  carry  the  burden,  draw 
the  load,  supply  the  revenue ;  and  in  performing  this  essential  office 
it  encourages  at  the  same  time  our  own  industries  and  protects 
our  own  people  in  their  chosen  employments.  That  is  the  mission 
and  purpose  of  a  protective  tariff.  That  is  what  we  mean  to  main- 
tain, and  any  measure  which  will  destroy  it  we  shall  firmly  resist,  and 
if  beaten  on  this  floor,  we  will  appeal  from  your  decision  to  the 
people,  before  whom  parties  and  policies  must  at  last  be  tried.  We 
have  free  trade  among  ourselves  throughout  thirty-eight  States  and 
the  Territories  and  among  sixty  millions  of  people.  Absolute  freedom 
of  exchange  within  our  own  borders  and  among  our  own  citizens  is 
the  law  of  the  Republic.  Reasonable  taxation  and  restraint  upon 
those  without  is  the  dictate  of  enlightened  patriotism  and  the 
doctrine  of  the  Republican  party. 

Free  trade  in  the  United  States  is  founded  upon  a  community  of 
equalities  and  reciprocities.  It  is  like  the  unrestrained  freedom  and 
reciprocal  relations  and  obligations  of  a  family.  Here  we  are  one 
country,  one  language,  one  allegiance,  one  standard  of  citizenship, 
one  flag,  one  Constitution,  one  nation,  one  destiny.  It  is  other- 
wise with  foreign  nations,  each  a  separate  organism,  a  distinct 
and  independent  political  society  organized  for  its  own,  to  protect 
its  own,  and  work  out  its  own  destiny.  We  deny  to  those  foreign 
nations  free  trade  with  us  upon  equal  terms  with  our  own  pro- 
ducers. The  foreign  producer  has  no  right  or  claim  to  equality 
with  our  own.  He  is  not  amenable  to  our  laws.  There  are  resting 
upon  him  none  of  the  obligations  of  citizenship.    He  pays  no  taxes. 


SPEECH  ON  THE  MILLS  BILL  539 

He  performs  no  civil  duties ;  is  subject  to  no  demands  for  military- 
service.  Lie  is  exempt  from  State,  county,  and  municipal  obligations. 
He  contributes  nothing  to  the  support,  the  progress,  and  glory  of 
the  nation.  Why  should  he  enjoy  unrestrained  equal  privileges  and 
profits  in  our  markets  with  our  producers,  our  labor,  and  our  tax- 
payers? Let  the  gentleman  who  follows  me  answer.  We  put  a 
burden  upon  his  productions,  we  discriminate  against  his  merchan- 
dise, because  he  is  alien  'to  us  and  our  interests,  and  we  do  it  to 
protect  our  own,  defend  our  own,  preserve  our  own  who  are  always 
with  us  in  adversity  and  prosperity,  in  sympathy  and  purpose,  and, 
if  necessary,  in  sacrifice.  That  is  the  principle  which  governs  us. 
I  submit  it  is  a  patriotic  and  righteous  one.  In  our  own  country, 
each  citizen  competes  with  the  other  in  free  and  unresentful  rivalry, 
while  with  the  rest  of  the  world  all  are  united  and  together  in 
resisting  outside  competition  as  we  would  foreign  interference. 

Free  foreign  trade  admits  the  foreigner  to  equal  privileges  with 
our  own  citizens.  It  invites  the  product  of  foreign  cheap  labor  to 
this  market  in  competition  with  the  domestic  product,  representing 
higher  and  better  paid  labor.  It  results  in  giving  our  money,  our 
manufactures,  and  our  markets  to  other  nations,  to  the  injury  of  our 
labor,  our  tradespeople,  and  our  farmers.  Protection  keeps  money, 
markets,  and  manufactures  at  home  for  the  benefit  of  our  own  people. 

It  is  scarcely  worth  while  to  more  than  state  the  proposition  that 
taxation  upon  a  foreign  competing  product  is  more  easily  paid  and 
less  burdensome  than  taxation  upon  the  non-competing  product.  In 
the  latter  it  is  always  added  to  the  foreign  cost,  and  therefore  paid 
by  the  consumer,  while  in  the  former,  where  the  duty  is  upon  the 
competing  product,  it  is  largely  paid  in  the  form  of  diminished 
profits  to  the  foreign  producer.  It  would  be  burdensome  beyond 
endurance  to  collect  our  taxes  from  the  products,  professions,  and 
labor  of  our  own  people. 

*^  ^  M,  M,  M,  M,  ^  M,  M^  ^ 

TT  -TV  -TT  Tt"  Tt"  'TT  "TV"  "TV"  "TV"  "Tv 

The  General  Effect  of  Protection 

I  now  come  to  consider  the  general  effect  of  the  protective  system 
upon  our  people  and  their  employments.  There  is  no  conflict  of 
interests  and  should  be  none  between  the  several  classes  of  pro- 
ducers and  the  consumers  in  the  United  States.    Their  interests  are 


540  McKINLEY 

one,  interrelated  and  interdependent.  That  which  benefits  one  bene- 
fits all ;  one  man's  work  has  relation  with  every  other  man's  work  in 
the  same  community ;  each  is  an  essential  part  of  the  grand  result 
to  be  attained,  and  that  statesmanship  which  would  seek  to  array 
the  one  against  the  other  for  any  purpose  is  narrow,  unworthy, 
and  unpatriotic.  The  President's  message  is  unhappily  in  that  direc- 
tion. The  discussion  had  on  this  floor  has  taken  that  turn.  Both 
have  been  calculated  to  create  antagonism  where  none  existed. 

The  farmer,  the  manufacturer,  the  laborer,  the  tradesman,  and 
the  producer  and  the  consumer  all  have  a  common  interest  in  the 
maintenance  of  a  protective  tariff.  All  are  alike  and  equally  favored 
by  the  system  which  you  seek  to  overthrow.  It  is  a  national  system, 
broad  and  universal  in  its  application ;  if  otherwise  it  should  be 
abandoned.  It  can  not  be  invoked  for  one  section  or  one  interest  to 
the  exclusion  of  others.  It  must  be  general  in  its  application  within 
the  contemplation  of  the  principle  upon  which  the  system  is  founded. 
We  have  been  living  under  it  for  twenty-seven  continuous  years,  and 
it  can  be  asserted  with  confidence  that  no  country  in  the  world  has 
achieved  such  industrial  advancement,  and  such  marvelous  progress 
in  arts,  science,  and  civilization  as  ours.  Tested  by  its  results,  it 
has  surpassed  all  other  revenue  systems. 

From  1789  to  1888,  a  period  of  ninety-nine  years,  there  have  been 
forty-seven  years  when  a  Democratic  revenue-tariff  policy  has  pre- 
vailed, and  fifty-two  years  under  the  protective  policy,  and  it  is  a 
noteworthy  fact  that  the  most  progressive  and  prosperous  periods  of 
our  history  in  every  department  of  human  effort  and  material  devel- 
opment were  during  the  fifty-two  years  when  the  protective  party 
was  in  control  and  protective  tariffs  were  maintained ;  and  the  most 
disastrous  years — years  of  want  and  wretchedness,  ruin  and  retro- 
gression, eventuating  in  insufficient  revenues  and  shattered  credits, 
individual  and  national — were  during  the  free-trade  or  revenue- 
tariff  eras  of  our  history.  No  man  living  who  passed  through  any 
of  the  latter  periods  but  would  dread  their  return,  and  would  flee 
from  them  as  he  would  escape  from  fire  and  pestilence ;  and  I 
believe  the  party  which  promotes  their  return  will  merit  and  receive 
popular  condemnation.  What  is  the  trouble  with  our  present  condi- 
tion? No  country  can  point  to  greater  prosperity  or  more  enduring 
evidences  of  substantial  progress  among  all  the  people.    Too  much 


SPEECH  ON  THE  MILLS  BILL  541 

money  is  being  collected,  it  is  said.  We  say  stop  it ;  not  by  indis- 
criminate and  vicious  legislation,  but  by  simple  business  methods. 
Do  it  on  simple,  practical  lines  and  we  will  help  you.  Buy  up  the 
bonds,  objectionable  as  it  may  be,  and  pay  the  nation's  debts,  if 
you  can  not  reduce  taxation.  You  could  have  done  this  long  ago. 
Nobody  is  chargeable  for  the  failure  and  delay  but  your  own 
Administration. 

Who  is  objecting  to  our  protective  system?  From  what  quarter 
does  the  complaint  come?  Not  from  the  enterprising  American 
citizen ;  not  from  the  manufacturer ;  not  from  the  laborer,  whose 
wages  it  improves ;  not  from  the  consumer,  for  he  is  fully  satisfied, 
because  under  it  he  buys  a  cheaper  and  a  better  product  than  he 
did  under  the  other  system;  not  from  the  farmer,  for  he  finds 
among  the  employes  of  the  protected  industries  his  best  and  most 
reliable  customers ;  not  from  the  merchant  or  the  tradesman,  for 
every  hive  of  industry  increases  the  number  of  his  customers  and 
enlarges  the  volume  of  his  trade.  Few,  indeed,  have  been  the  peti- 
tions presented  to  this  House  asking  for  any  reduction  of  duties 
upon  imports.  None,  that  I  have  seen  or  heard  of,  and  I  have 
watched  with  the  deepest  interest  the  number  and  character  of 
these  petitions  that  I  might  gather  from  them  the  drift  of  public 
sentiment — I  say  I  have  seen  none  asking  for  the  passage  of  this 
bill,  or  for  any  such  departure  from  the  fiscal  policy  of  the  Govern- 
ment so  long  recognized  and  followed,  while  against  this  legislation 
there  has  been  no  limit  to  petitions,  memorials,  prayers,  and  protests, 
from  producer  and  consumer  alike. 

TV"  TT  TV  TV"  TV"  Tf  TV"  TV"  TV"  Tt' 

A  Home  Market 

Why,  Mr.  Chairman,  the  establishment  of  a  furnace  or  factory  or 
mill  in  any  neighborhood  has  the  effect  at  once  to  enhance  the  value 
of  all  property  and  all  values  for  miles  surrounding  it.  They  pro- 
duce increased  activity.  The  farmer  has  a  better  and  a  nearer  mar- 
ket for  his  products.  The  merchant,  the  butcher,  the  grocer,  have 
an  increased  trade.  The  carpenter  is  in  greater  demand  ;  he  is  called 
upon  to  build  more  houses.  Every  branch  of  trade,  every  avenue  of 
labor,  will  feel  almost  immediately  the  energizing  influence  of  a  new 


542  McKINLEY 

industry.  The  truck  farm  is  in  demand ;  the  perishable  products,  the 
fruits,  the  vegetables,  which  in  many  cases  will  not  bear  exportation 
and  for  which  a  foreign  market  is  too  distant  to  be  available,  find  a 
constant  and  ready  demand  at  good  paying  prices. 

What  the  agriculturist  of  this  country  wants  more  than  anything 
else,  after  he  has  gathered  his  crop,  are  consumers,  consumers  at 
home,  men  who  do  not  produce  what  they  eat,  who  must  purchase 
all  they  consume  ;  men  who  are  engaged  in  manufacturing,  in  mining, 
in  cotton-spinning,  in  the  potteries,  and  in  the  thousands  of  produc- 
tive industries  which  command  all  their  time  and  energy,  and  whose 
employments  do  not  admit  of  their  producing  their  own  food. 

The  American  agriculturist  further  wants  these  consurners  near 
and  convenient  to  his  field  of  supply.  Cheap  as  inland  transporta- 
tion is,  every  mile  saved  is  money  made.  Every  manufacturing 
establishment  in  the  United  States,  wherever  situated,  is  of  priceless 
value  to  the  farmers  of  the  country.  The  six  manufacturing  States 
of  New  England  aptly  illustrate  the  great  value  of  a  home  market 
to  the  Western  farmer.  These  States  have  reached  the  highest 
perfection  in  skill  and  manufactures.  They  do  not  raise  from  their 
own  soil,  with  the  exception  of  hay  and  potatoes,  but  a  small  frac- 
tion of  what  their  inhabitants  require  and  consume :  they  could  not 
from  their  own  fields  and  granaries  feed  the  population  which  they 
had  in  1830,  much  less  their  present  population.  The  most  intense 
revenue-reformer,  the  most  unenlightened  Democrat,  will  have  to 
confess  that  New  England  is  indebted  in  large  part  for  her  splendid 
development  to  the  protective  system.  Now,  have  her  prosperity  and 
progress  been  secured  at  the  sacrifice  of  other  interests  and  other 
sections  ?  I  answer.  No ;  but  they  have  brought,  as  I  believe  I  shall 
be  able  to  show,  a  positive  blessing  to  all  of  our  60,000,000  of  people. 

In  1880  the  population  of  these  six  States  was  over  4,000,000. 
The  food  products  required  by  their  people,  the  very  necessities  of 
their  daily  life  in  a  large  measure,  came  from  other  States  and  remote 
sections  of  the  Union.  They  raised  in  1880  but  one-quarter  of  i  per 
cent,  of  the  total  wheat  production  of  the  United  States.  They  raised 
in  the  same  year  but  one-half  of  i  per  cent,  of  the  total  crop  of 
Indian  corn,  2?  per  cent,  of  the  oats,  12  per  cent,  of  the  hay,  and  13 
per  cent,  of  the  potatoes  which  were  produced  in  the  United  States. 
What   did   they   consume?    What   did   they   buy   of   the   Western 


SPEECH  ON  THE  MILLS  BILL  543 

farmer?  Fifty  millions  of  dollars'  worth  of  meat  was  consumed  by 
their  industrial  people  in  a  single  year.  The  extent  of  their  needs 
is  strikingly  shown  by  the  fact  (obtained  from  the  accounts  of 
Commissioner  Fink)  that  during  the  year  1884  the  "trunk  lines" 
brought  into  New  England  no  less  than  470,000  tons  of  flour  and 
950,000  tons  of  grain.  At  200  pounds  to  the  barrel  of  flour,  this  is 
an  importation  of  4,700,006  barrels,  or  one  and  one-fifth,  nearly,  for 
each  inhabitant.  During  the  same  year  there  were  exported  from 
Boston  and  Portland,  the  only  points  in  New  England  from  which 
breadstuff's  are  sent  abroad,  2,100,000  barrels  of  flour,  leaving  for 
consumption  within  these  States  2,600,000  barrels.  These  figures 
take  no  account  of  the  large  trade  by  water  from  New  York.  I  am 
informed  that  a  large  part  of  the  flour  consumed  in  Connecticut, 
Rhode  Island,  and  Southern  Massachusetts  is  received  in  this  way, 
but  no  reliable  statistics  are  available.  It  is  reasonable,  however, 
to  suppose,  and  this  comes  to  me  from  what  I  deem  good  authority, 
that  the  amount  thus  received  and  consumed  offsets  a  large  portion 
of  the  foreign  exports  to  which  I  have  referred. 

Of  the  grain  received  during  the  same  year  rather  less  than 
400,000  tons  were  exported,  leaving  for  New  England  consumption 
550,000  tons,  for  all  of  which  these  States  were  the  customers  of 
the  West  in  addition  to  the  amount  grown  upon  their  own  soil.  In 
addition  to  this.  New  England  consumed,  in  i886-'87  in  her  factories, 
nearly  one-fourth  of  the  entire  cotton  crop  of  the  country.  More 
than  this,  she  used  in  her  woolen  mills  in  1880  fully  one-half  of 
the  entire  wool  clip  of  the  United  States,  and  during  the  year 
1886  she  consumed  more  than  one-sixth  of  the  entire  anthracite-coal 
production  of  the  country  and  52  per  cent,  of  the  bituminous-coal 
production,  and  every  pound  of  both  came  from  the  Middle  and 
Southern  States. 

Is  not  New  England  (I  appeal  to  the  gentlemen  of  the  other  side, 
I  appeal  to  the  farmers  of  the  country)  worth  preserving?  Is  not 
the  industrial  system  which  makes  such  a  community  of  consumers 
for  agricultural  products  possible  worth  maintaining?  Does  not 
she  give  you  a  trade  and  an  exchange  of  products  worth  your  while 
to  guard  with  the  most  considerate  care?  And  does  not  her  con- 
dition indicate  the  wisdom  of  the  policy  we  advocate?  Is  not  her 
market  better  for  you  than  a  foreign  one?    Is  not  New  England  a 


544  McKINLEY 

better  customer  for  you,  more  reliable,  more  easily  reached,  more 
stable,  than  Old  England  ?  Is  not  Boston  a  better  consumer  for  the 
people  of  the  United  States  than  London,  New  York  than  Liverpool, 
Pittsburgh  than  Manchester,  Cincinnati  than  Birmingham? 

New  England  buys  of  you  for  all  her  wants ;  Old  England  takes 
not  a  pound  or  a  bushel  from  you  except  what  she  must  have  and 
can  not  get  elsewhere. 

Now,  let  us  contrast  this  home  market  of  New  England  with  the 
foreign  market  of  Old  England,  In  1880  New  England  consumed 
540,000,000  pounds  of  cotton,  at  11. 61  cents  a  pound,  which  in  value 
then  amounted  to  $62,695,000,  20  per  cent,  greater  than  the  per 
capita  value  of  all  our  domestic  exports  to  the  United  Kingdom,  and 
.this  was  only  New  England's  contribution  to  the  Southern  producers 
of  cotton.  She  sends  at  least  $70,000,000  to  the  West  and  Northwest 
for  her  food  supplies.  She  sends  to  the  wool-growers  of  the  Middle, 
Western,  and  Pacific  States  $40,000,000  annually  for  their  fleeces. 
I  repeat,  is  not  this  market  worth  preserving,  ay,  cherishing,  and 
does  it  not  make  us  long  to  have  New  England  thrift.  New  England 
enterprise,  and  New  England  politics  more  generally  distributed 
throughout  all  sections  of  the  country? 

You  can  destroy  this  valuable  home  market  by  such  legislation 
as  is  proposed  in  this  bill ;  you  can  diminish  this  demand  for  food, 
for  cotton,  for  wool,  for  flax,  and  hemp  produced  in  other  sections 
of  the  country  by  following  the  delusive  theories  of  our  friends  on 
the  other  side  of  the  House ;  you  can  diminish  the  capacity  of  the 
operatives  to  buy  of  you  by  diminishing  their  wages ;  you  can  drive 
them  from  the  cotton  and  woolen  factories  to  the  farms ;  they  will 
then  drift  to  the  West  and  Northwest,  not  to  engage  in  manufacture, 
but  in  a  great  measure  to  become  tillers  of  the  soil,  and  instead  of 
being  as  they  are  now,  and  as  they  will  be  under  a  proper  tariff 
system,  your  consumers,  they  become  your  competitors.  They  go 
from  the  ranks  of  consumers  to  the  ranks  of  producers ;  diminish  the 
consumers  and  increase  the  producers.  The  foreign  market  for  agri- 
cultural products  is  one  of  the  delusions  of  free  trade.  If  it  ever 
had  any  real  substance  as  against  a  good  home  market  that  has  long 
since  disappeared. 

The  chairman  of  the  Ways  and  Means  Committee  says  to  the 
Western  farmer,  "Let  New  England  go.    Pass  her  by  and  go  to  Old 


SPEECH  ON  THE  MILLS  BILL  545 

England."  Well,  that  is  about  as  practical  as  the  Democratic  party 
ordinarily  is. 

Why,  it  was  only  a  little  while  ago  that  I  remember  to  have  heard 
the  gentleman  from  Arkansas  (Mr.  Dunn),  a  prominent  member  of 
this  House  and  chairman  of  one  of  its  leading  committees,  say  what 
I  now  read  from  the  Record: 

"The  wheat  producer  of  the  Northwest  is  standing  face  to  face 
with  the  wheat  producer  of  India.  A  few  years  ago  India  shipped 
40,000  bushels  of  wheat.  Last  year  (1885)  she  put  into  the  market 
40,000,000  bushels.  Can  you  protect  the  Northwest  farmer  against 
that  labor  ?  India  can  put  wheat  down  in  the  markets  of  consump- 
tion in  Europe  cheaper  than  we  can  transport  it  from  the  fields  of 
production  to  the  markets  of  consumption ;  that  is  to  say,  India  can 
produce  and  market  her  wheat  in  Europe  for  what  it  costs  the  farmer 
of  the  Northwest  to  transport  his  to  the  market  of  consumption, 
without  allowing  him  for  the  cost  of  production.  In  other  words,  the 
transportation  of  wheat  costs  the  American  farmer  as  much  as  both 
transportation  and  production  cost  the  India  farmer." 

In  the  face  of  a  statement  like  this,  from  such  high  Democratic 
authority,  how,  I  ask,  is  the  wheat  of  the  American  farmer  to  reach 
the  European  market  with  any  profit  to  our  producers?  And  yet 
it  is  to  this  kind  of  competition  the  chairman  of  the  Ways  and 
Means  Committee  invites  the  American  farmer.  Do  the  farmers 
want  such  a  market  with  such  a  competition?  What  their  answer 
will  be  no  man  can  doubt.  They  reject  with  indignation  and  scorn 
the  chairman's  invitation.  The  home  market  is  the  best,  besides 
being  the  safest.  It  has  got  the  most  money  to  spend,  and  spends 
the  most.    It  consumes  the  most ;  it  is  therefore  the  most  profitable. 

The  masses  of  our  people  live  better  than  any  people  in  the  world. 
Great  Britain  only  buys  our  food  products  when  she  has  not  enough 
of  her  own  and  can  reach  no  other  supply.  This  market,  therefore, 
is  fitful  and  fluctuating,  and  can  not  be  relied  upon  as  we  can  rely 
upon  our  own  consumers.  The  foreign  market  under  a  revenue 
tariff  for  agricultural  products  has  not  been  encouraging  in  our 
own  experience  in  the  past.  It  promises  less  under  such  a  system 
in  the  future. 


546  McKINLEY 

Increased  Importations  the  Purpose  of  the  Bill 

The  chairman  of  the  committee  in  opening  this  debate  boldly 
announced  that  we  must  increase  foreign  importations  to  secure 
national  prosperity.  How  much  does  the  gentleman  and  the  party 
with  which  he  is  associated  desire  to  increase  importations?  Are 
they  not  large  enough  already  ?  Are  they  not  now  crowding  our 
producers  and  diminishing  their  annual  productions?  Are  they  not 
already  making  labor  restless,  filling  it  with  apprehension  and  un- 
certainty as  to  the  future  ?  Is  this  country  to  be  the  dumping  ground 
of  foreign  products  ?  During  the  last  fiscal  year  over  $233,000,000  in 
value  of  foreign  merchandise  was  imported  into  the  United  States 
free  of  duty,  and  over  $450,000,000  additional  was  imported  which 
paid  a  duty.  Is  this  not  enough  ?  Do  the  iron  and  steel  workers  want 
further  importations  in  their  line,  representing  cheap  labor,  to  com- 
pete with  the  product  of  their  labor?  Over  $50,000,000  in  value 
of  iron  and  steel  manufactures  was  imported  last  year,  every  dollar 
of  which  represented  foreign  capital  and  foreign  labor,  which  might 
well  have  been  produced  at  home.  Every  ton  could  have  been  made 
here,  and  American  hands  were  waiting  to  make  it. 

How  much  labor  do  you  suppose  was  represented  by  the  $50,000,- 
000  worth  of  iron  and  steel  that  came  into  this  country  last  year? 
It  would  have  taken  1,740  puddlers  and  helpers,  working  every  day 
for  300  days  in  the  year,  to  have  produced  the  scrap-iron  that  came 
from  Europe  last  year.  It  would  have  taken  2,500  men  300  days  to 
have  produced  the  bar  and  structural  iron,  and  steel  billets,  and 
slabs,  and  ingots  which  were  imported  into  the  United  States  last 
year.  It  would  have  taken  300  men  300  days,  besides  those  engaged 
in  preparing  the  raw  material,  to  have  produced  the  plates  and 
sheets,  the  corrugated  iron,  and  the  steel  in  various  forms  imported 
last  year.  It  would  have  taken  3,700  men  300  days  to  have  made 
the  wire  rods  and  the  nails  and  the  screws  and  wire  in  various  shapes 
which  were  imported  into  the  United  States  last  year.  It  would  have 
taken  800  men  300  days  to  have  made  the  washers,  and  the  bolts, 
and  the  fish-plates,  and  railway-plates,  the  steel  tire,  hinge-iron,  and 
tubes  of  steel  which  were  imported  into  this  country  last  year.  It 
would  have  taken  24,000  men  to  manufacture  the  tin-plate  imported 
last  year.    Summing  up  these  figures,  33,540  men,  working  for  300 


SPEECH  ON  THE  MILLS  BILL  547 

days,  would  have  been  required  to  produce  the  $50,000,000  worth 
of  iron  and  steel  which  we  imported  last  year.  Do  you  want  that 
volume  increased?  Ten  million  sixty-two  thousand  is  the  aggregate 
number  of  days'  work  that  were  taken  from  American  workingmen, 
every  day's  work  of  which  they  could  have  performed,  and  were 
waiting  ready  to  perform.  Including  all  branches  of  labor  required 
to  manufacture  the  $50,000,000  worth  of  imported  iron  and  steel  and 
the  manufacture  thereof,  taking  into  account  the  labor  employed  in 
the  mining,  transportation,  and  manipulation  of  the  raw  materials, 
and  it  would  employ  nearly,  if  not  quite,  one  hundred  thousand  men. 

I  do  not  know  what  you  think  about  it ;  but  I  would  not  permit  a 
single  ton  of  steel  to  come  into  the  United  States  if  our  own  labor 
could  make  it.  Let  American  labor,  as  far  as  practicable,  manufac- 
ture American  products.  And  if  you  do  not  like  it,  you  know  what 
you  can  do.  This  Government  is  made  for  Americans,  native-born 
and  naturalized ;  and  every  pound,  every  bushel,  every  ton,  every 
yard  of  foreign  product  that  comes  into  this  country  to  compete 
with  ours  deprives  American  labor  of  what  justly  belongs  to  it. 

Do  the  farmers  want  increased  importations  of  agricultural  prod- 
ucts? Of  barley  alone  there  were  $6,152,000  of  value  imported  last 
year,  and  of  vegetables  a  value  of  $2,276,000.  The  total  imports  of 
the  products  of  agriculture  for  the  year  1887  free  and  dutiable  were 
in  value  $197,308,240.  Of  this  sum  $46,678,443  was  admitted  free 
of  duty  and  the  remainder  paid  a  duty.  Do  the  agriculturists  want 
the  duties  all  removed  and  their  products  driven  from  this  market? 
Seven  million  three  hundred  thousand  dollars'  worth  of  foreign 
glass  came  into  this  country  last  year.  Do  the  glass-blowers  want 
this  volume  increased?  Five  million  live  hundred  and  forty-five 
thousand  dollars'  worth  of  pottery  of  foreign  make  entered  our 
market  last  year.  Do  the  potters  want  this  vast  sum  augmented? 
Will  the  wool-growers  who  were  compelled  to  compete  with 
$16,000,000  worth  of  foreign  wool  last  year  relish  the  prospect  of  hav- 
ing their  product  further  displaced  next  year ;  and  the  labor  engaged 
in  woolen  manufactories  in  this  country,  are  they  anxious  that  the 
$44,000,000  worth  of  woolen  goods  imported  in  1887  in  competition 
with  the  products  of  their  labor  shall  be  multiplied  in  1889?  All 
these  importations  will  be  greatly  increased  if  this  bill  shall  become 
a  law.    Every  invoice  of  foreign  goods  which  comes  here  the  like  of 


548  McKINLEY 

which  we  can  make  crowds  out  just  so  much  American  labor.    Is 
there  to  be  no  Hmit  to  this  foreign  invasion? 

*I  answer,  only  to  the  extent  that  our  people  shall  make  importa- 
tions impossible  by  reducing  the  cost  of  the  home  product.  This 
will  be  the  only  restraint  upon  foreign  merchandise  glutting  this 
market  to  the  displacement  of  our  own.  If  our  present  labor  condi- 
tions are  maintained — and  this  bill  gets  upon  our  statute-book — 
there  will  be  no  barrier  in  the  way  of  a  perfect  inundation  of  foreign 
goods  in  the  United  States.  It  should  not  be  forgotten  that  low 
duties  or  no  duties  substitute  foreign  imports  for  homemade  and 
home-grown  products,  and  to  the  extent  of  such  substitution 
take  work  and  wages  from  American  labor.  The  effect  of  this  bill,  and 
there  can  be  no  other,  is  to  increase  importations,  displace  our  own 
products  by  foreign  ones,  diminish  the  output  of  our  factories  and 
mills,  curtail  the  demand  for  labor,  and  reduce  the  wages  of  those 
who  may  be  able  to  get  work.  This  result  is  as  clear  and  manifest 
to  me  as  the  simplest  mathematical  problem,  and  we  have  only  to 
look  at  the  wage  scale  of  competing  nations  to  know  what  our  labor 
will  come  to  with  free  trade  or  its  equivalent.  We  can  not  compete 
with  foreign  nations  without  the  restraint  of  a  tariff  unless  we  have 
equal  conditions  and  equal  labor  cost.  To  do  this  we  must  intro- 
duce European  conditions  and  European  methods  in  the  United 
States,  and  that  is  what  this  bill  and  all  similar  legislation  mean. 

"The  trammels  of  trade  must  be  removed"  is  the  language  em- 
ployed by  the  friends  of  this  bill.  How  and  in  what  way?  First, 
by  removing  the  duty  from  raw  materials  used  in  manufacture,  which 
of  necessity  will  be  at  the  expense  and  loss  of  those  engaged  in 
preparing  them.  But  to  a  tariff  reformer  that  is  of  little  account. 
This  trammel  must  go,  to  enable  the  domestic  manufacturer  to 
compete  with  the  foreign  manufacturer  at  home  and  abroad.  After 
this,  and  next  in  order,  the  trammel  of  high  wages  must  be  removed. 
This  is  the  most  important  and  essential  of  all.  This  is  the  chief 
obstruction.  Free  raw  material  will  not  equalize  the  condition  of 
manufacturers  at  home  with  those  abroad.  Cheap  labor,  underpaid 
labor,  underfed  labor  will  be  the  next  demand  of  the  advocates  of  this 
bill.  Some  of  them  have  been  frank  enough  to  avow  it  already. 
This  is  the  inexorable  logic  of  the  situation.  If  we  are  to  control  the 
whole  of  our  own  market  and  send  our  manufactures  across  the  sea, 


SPEECH  ON  THE  MILLS  BILL  549 

it  can  be  accomplished  in  one  way  only,  by  reducing  the  cost  of  the 
home  product  to  the  same  or  below  the  cost  of  the  foreign  product. 
To  do  this  every  intelligent  man  knows  involves  an  enormous  reduc- 
tion of  the  wages  of  American  workingmen.  To  this  a  revenue  tariff 
comes  at  last  and  from  which  there  is  no  escape  and  against  it  every 
true  American  interest  cries  out  in  an  emphatic  and  earnest  protest. 
I  propose  a  wiser  and  more  patriotic  solution  of  the  difficulties 
of  our  financial  situation.  If  we  will  buy  more  American  goods  and 
less  foreign,  we  will  reduce  the  income  of  the  Government  and  leave 
and  increase  the  surplus  among  the  people.  If  we  will  buy  more 
American  merchandise  and  less  of  foreign  make,  manufactures  at 
home  will  run  the  year  round  and  labor  will  be  suitably  rewarded  and 
steadily  employed.  If  we  had  some  of  that  lofty  patriotism  evinced 
by  the  fathers,  if  we  were  more  American  in  feeling,  sentiment,  and 
purpose,  there  would  be  fewer  advocates  of  this  bill. 

American  Wages  against  European  Wages 

There  has  been  much  effort  made  in  this  debate  to  show  that, 
after  all,  American  workingmen  get  no  better  pay  than  the  working- 
men  of  other  countries.  Let  us  consider  this  branch  of  the  dis- 
cussion for  a  little  while,  for  if  it  be  true  that  labor  here  is  no  better 
rewarded  than  elsewhere,  then  the  strength  of  protection  is  much 
weakened.  I  beg  to  cite,  against  the  unsupported  statements  of  the 
gentlemen  who  have  already  spoken  upon  the  other  side,  the  testi- 
mony of  American  workingmen  whose  opportunity  for  information 
from   experience    in    both    countries,    and    otherwise,    makes    their 

evidence  incontrovertible. 

*********** 

The  chief  and  controlling  question  is  one  of  labor,  and  so  long  as 
the  labor  cost  here  in  any  department  of  employment  exceeds  the 
labor  cost  in  Europe  so  long  we  must  have  a  protective  tariff  which 
shall  compensate  for  this  difference.  And  whether  the  labor  is  in 
the  rice-fields  of  Georgia  and  of  the  Carolinas,  or  in  the  wheat- 
fields  of  the  Northwest,  in  the  factories  of  New  England,  the  mines 
of  Maryland  and  Virginia,  or  the  furnaces  of  Pennsylvania,  Ohio, 
and  New  Jersey,  it  must  be  protected  against  the  less  rewarded 
labor  whose  products  come  in  competition  with  theirs.    Either  this 


550  McKINLEY 

tariff  must  be  maintained  to  maintain  the  difference  of  wages  or  one 
of  two  things  must  inevitably  occur :  we  must  abandon  production 
in  many  of  the  most  valuable  fields  of  industry  here  or  our  labor 
must  come  down  to  the  standard  of  the  competing  labor ;  and  we 
may  discuss  our  theories  until  the  frosts  of  December  and  we  can 
not  alter  the  fact.  .  .  . 

The  expectation  of  cheaper  clothes  is  not  sufficient  to  justify 
the  action  of  the  majority.  This  is  too  narrow  for  a  national  issue. 
Nobody,  so  far  as  I  have  learned,  has  expressed  dissatisfaction  with 
the  present  price  of  clothing.  It  is  a  political  objection  ;  it  is  a  party 
slogan.  Certainly  nobody  is  unhappy  over  the  cost  of  clothing  except 
those  who  are  amply  able  to  pay  even  a  higher  price  than  is  now 
exacted.  And  besides,  if  this  bill  should  pass,  and  the  effect  would 
be  (as  it  inevitably  must  be)  to  destroy  our  domestic  manufac- 
tories, the  era  of  low  prices  would  vanish,  and  the  foreign  manufac- 
turer would  compel  the  American  consumer  to  pay  higher  prices  than 
he  has  been  accustomed  to  pay  under  "the  robber  tariff,"  so  called. 

We  recall,  Mr.  Chairman,  that  the  chairman  of  the  Committee  on 
Ways  and  Means  talked  about  the  laboring  man  who  worked  for  ten 
days  at  a  dollar  a  day,  and  then  went  with  his  ten  dollars  wages  to 
buy  a  suit  of  clothes.  It  is  the  old  story.  It  is  found  in  the  works  of 
Adam  Smith.  I  have  heard  it  in  this  House  for  ten  years  past.  It 
has  served  many  a  free-trader.  It  is  the  old  story,  I  repeat,  of  the 
man  who  gets  a  dollar  a  day  for  his  wages,  and  having  worked  for  the 
ten  days  goes  to  buy  his  suit  of  clothes.  He  believes  he  can  buy  it 
for  just  $io  ;  but  ''the  robber  manufacturers"  have  been  to  Congress, 
and  have  got  loo  per  cent,  put  upon  the  goods  in  the  shape  of  a 
tariff,  and  the  suit  of  clothes  he  finds  can  not  be  bought  for  $io,  but 
he  is  asked  S20  for  it,  and  so  he  has  got  to  go  back  to  ten  days  more 
of  sweat ;  ten  days  more  of  toil ;  ten  days  more  of  wear  and  tear  of 
muscle  and  brain  to  earn  the  $10  to  purchase  the  suit  of  clothes. 
Then  the  chairman  gravely  asks,  Is  not  ten  days  entirely  annihilated? 

Now  a  gentleman  who  read  that  speech  or  heard  it  was  so  touched 
by  the  pathetic  story  that  he  looked  into  it  and  sent  me  a  suit  of 
clothes  identical  with  that  described  by  the  gentleman  from  Texas, 
and  he  sent  me  also  the  bill  for  it,  and  here  is  the  entire  suit ; 
"robber  tariffs  and  taxes  and  all"  have  been  added,  and  the  retail 


SPEECH  ON  THE  MILLS  BILL  551 

cost  is  what?  Just  $10.  So  the  poor  fellow  does  not  have  to  go 
back  to  work  ten  days  more  to  get  that  suit  of  clothes.  He  takes  the 
suit  with  him  and  pays  for  it  just  Sio.  .  .  . 

And  now,  Mr.  Chairman,  I  never  knew  of  a  gentleman  engaged 
in  this  business  who  sold  his  clothes  without  a  profit.  And  there  is 
the  same  Sic  suit  described  by  the  gentleman  from  Texas  that  can 
be  bought  in  the  city  of  Boston,  can  be  bought  in  Philadelphia,  in 
New  York,  in  Chicago,  in  Pittsburgh,  anywhere  throughout  the 
country  at  Sio  retail  the  whole  suit,  coat,  pants,  and  vest,  and 
40  per  cent,  less  than  it  could  have  been  bought  in  i860  under  your 
low  tariff  and  low  wages  of  that  period.  It  is  a  pity  to  destroy  the 
sad  picture  of  the  gentleman  from  Texas  which  was  to  be  used  in 
the  campaign,  but  the  truth  must  be  told.  But  do  you  know  that  if 
it  were  not  for  protection  you  would  pay  a  great  deal  more  for 
these  clothes  ?  I  do  not  intend  to  go  into  that  branch  of  the  ques- 
tion, but  I  want  to  give  one  brief  illustration  of  how  the  absence  of 
American  competition  immediately  sends  up  the  foreign  prices,  and 
it  is  an  illustration  that  every  man  will  remember.  My  friend  from 
Missouri  (Mr.  Clardy),  who  sits  in  front  of  me,  will  remember  it. 
The  Missouri  Glass  Company  was  organized  several  years  ago  for  the 
jnanufacture  of  coarse  fluted  glass  and  cathedral  glass.  Last  Novem- 
ber the  factory  was  destroyed  by  fire.  Cathedral  glass  was  their 
specialty.  Within  ten  days  from  the  time  that  splendid  property  was 
reduced  to  ashes  the  foreign  price  of  cathedral  glass  advanced 
28  per  cent,  to  the  American  consumer.  Showing  that  whether  you 
destroy  the  American  production  by  free  trade  or  by  fire  it  is  the 
same  thing;  the  price  goes  up  to  the  American  consumer,  and  all 
you  can  do  is  to  pay  the  price  the  foreigner  chooses  to  ask. 

The  Poor  Man's  Blankets 

Now,  the  gentleman  had  a  lot  of  blankets  here  the  other  day. 
The  very  climax  of  the  gentleman's  speech  was  reached  when  he  came 
to  a  description  of  the  American  blankets,  and  the  enormous  burdens 
that  the  tariff  laid  upon  the  poor  man's  bed  and  covering.  .  .  . 

Now,  Mr.  Chairman,  what  did  these  same  blankets  cost  in  i860 
under  a  revenue  tariff,  under  the  free-trade  domination  of  this  coun- 
try by  the  Democratic  party?    What  did  we  pay  for   the  same 


552  McKINLEY 

blankets  that  year  as  contrasted  with  what  we  pay  now?  The 
blanket  that  sells  to-day  for  $1.02  sold  in  i860  for  S2.  The  blanket 
that  sells  now  for  $1.45  sold  in  i860  for  $2.25.  The  blanket  that 
sells  now  for  $1.90  sold  in  i860  for  S3. 50.  The  blanket  that  sells 
now  for  $2.58  sold  for  $3.75  in  i860.  The  blanket  that  sells  now 
for  $4.35  sold  for  $7.50  in  i860.  The  blanket  that  sells  for  $5.85 
now  sold  for  $10.00  in  i860.  The  blanket  that  sells  now  for  S6.80 
sold  for  S14  in  i860.  ... 

The  weekly  earnings  of  the  spinner  in  i860  could  buy  three  pairs 
of  cheap  blankets  for  one  week's  work.  The  spinner  under  American 
protection  in  1888,  for  the  price  of  one  week's  work  can  buy  fifteen 
pairs  of  blankets.  Talk  about  productive  capacity !  Think  about 
buying  capacity !  The  spinner  buys  his  blankets  for  one  half  what 
they  cost  him  in  i860;  and  he  gets  two  and  a  half  times  as  much 
for  his  labor  in  1888  as  he  got  in  i860.  Do  you  wonder  these  men 
do  not  like  your  bill  ?  Do  you  wonder  these  men  condemn  the 
action  of  the  committee  for  not  listening  to  their  protests?  Why, 
you  are  preparing  here  to-day— and  that  is  the  purpose  and  effect  of 
this  bill — you  are  preparing  here  to  reduce  the  scale  of  American 
wages.  .  .  . 

The  United  States  Buying  Foreign  Blankets 

On  the  25th  of  March,  1887,  the  United  States  Government 
advertised  for  bids  for  the  purchase  of  blankets  for  the  use  of  the 
medical  department  of  the  Army.  This  was  in  1887,  under  the 
present  Administration.  There  were  foreign  bids  and  there  were 
American  bids.  Now,  if  the  President  is  right  in  saying  that  the 
duty  is  added  to  the  cost,  then  the  foreign  cost,  duty  added,  ought 
to  be  just  equal  to  the  American  price.  Now,  what  are  the  facts  of 
this  transaction  ?  As  I  have  said,  there  was  a  foreign  bid,  and  there 
was  an  American  bid.  The  foreign  bid  was  for  a  four-pound  blanket 
for  medical  purposes,  to  be  furnished  for  $2,251^0-  For  the  same 
four-pound  blanket  for  the  same  purposes,  the  American  bid  was 
$2.56,  there  being  a  difference  of  3ofir  [sic]  cents.  Who  do  you 
suppose  got  the  contract  ?  There  was  a  foreign  bid,  and  an  American 
bid,  and  the  difference  between  the  bids  was  30  cents  on  each 
blanket.    Now  tell  me  which  manufacturer,  the  American  or  English, 


SPEECH  ON  THE  MILLS  BILL  553 

got  the  contract  ?  Is  there  anybody  here  who  would  not  have  given 
it  to  the  American,  there  being  a  difference  of  only  30  cents  between 
the  bids? 

Is  there  any  gentleman  on  this  floor  who  would  send  abroad  to 
get  a  pair  of  blankets  merely  to  save  30  cents  on  them,  thus  taking 
away  from  the  American  manufacturer  and  the  American  farmer 
and  the  American  laborer  that  much  business?  However  that  may 
be,  that  contract  did  go  abroad.  English  labor,  with  foreign  wool, 
made  those  2,000  blankets  for  the  use  of  our  army.  American  labor 
was  boycotted  and  they  came  in  without  paying  any  duty.  The 
Government  took  advantage  of  a  law  that  stands  on  the  statute- 
book  and  admitted  them  free  of  duty.  There  being  so  little  revenue 
in  the  Treasury,  it  was  necessary,  of  course,  to  save  every  penny, 
so  they  took  advantage  of  that  law  which  permits  the  United  States 
to  bring  in  goods  free  of  duty. 

*********** 

Mr.  Chairman,  I  wish  that  this  Government  of  ours,  which  is 
supported  by  its  own  people,  and  not  by  foreigners^  would  patronize 
its  own  people.  I  think  that  is  an  example  of  patriotism  which 
should  be  set  by  those  charged  with  public  administration.  I  wish 
the  men  who  pay  the  taxes  to  support  this  Government,  to  pay  the 
President's  salary  and  other  expenses  of  the  Government,  would  be 
patronized  when  the  Government  has  anything  to  buy,  don't  you? 
And  are  you  not  a  little  ashamed  of  this  transaction,  all  of  you? 
I  do  not  know  whether  the  like  was  ever  done  under  any  former 
administration  or  not ;  but  it  never  ought  to  be  done,  except  in  time 
of  war  or  great  public  necessity,  by  any  future  administration  of 
any  party. 


XXIV 

REED :  SPEECH  ON  THE  MILLS  BILL^ 

THE  system  we  believe  in  is  called  protection,  and  is  founded 
upon  the  doctrine  that  a  great  nation  like  ours,  having  all 
varieties  of  climate  and  soil,  will  be  richer,  more  independent,  and 
more  thrifty,  and  that  its  people  will  be  better  fitted  to  enjoy  the 
comforts  and  luxuries  of  peace,  and  better  situated  to  endure  the 
calamities  of  war,  if  its  own  people  supply  its  own  wants. 

I  do  not  purpose  to  defend  protection.  Its  vast  growth  within  the 
last  quarter  of  a  century  defends  it  better  even  than  eloquent  ora- 
tions. It  was  born  with  the  Republic.  It  is  the  faith  and  practice 
of  every  civilized  nation  under  the  sun  save  one.  It  has  survived  the 
assaults  of  all  the  professors  of  the  "dismal  science"  called  political 
economy.  It  has  stood  up  against  all  the  half  knowledge  of  learned 
men  who  never  had  sense  enough  to  transmute  their  learning 
into  wisdom. 

On  the  face  of  the  earth  to-day  there  are  but  two  sets  of  people 
who  believe  in  free  trade,  whether  pure  and  simple  or  disguised  as 
revenue  reform,  and  those  two  are  the  masked  majority  of  the 
Committee  on  Ways  and  Means  and  their  followers,  and  the  United 
Kingdom  of  Great  Britain  and  Ireland,  with  Ireland  suppressed. 

Russia,  the  granary  of  Europe,  has  abandoned  free  trade,  with 
the  striking  result  that  whereas,  in  1876,  before  the  duties  were 
raised,  she  bought  eight  million  hundred-weight  of  British  metals  and 
paid  therefor  thirty  million  of  dollars  (eight  for  thirty),  she  got  the 
same  quantity  in  1884  and  paid  only  seventeen  million  for  it  (eight 
for  seventeen).  Three  dollars  and  seventy-five  cents  per  hundred- 
weight before  tariff,  and  $2.12^  after.  Austria,  Germany,  Italy, 
Mexico,  and  the  Dominion  of  Canada,  that  child  of  Britain  herself, 

1  Thomas  B.  Reed  (i  839-1 902),  Speech  on  the  Mills  Bill,  in  the  House  of 
Representatives,  May  19,  1888. 

554 


SPEECH  ON  THE  MILLS  BILL  555 

have  all  joined  the  army  of  protection.  It  is  the  instinct  of  humanity 
against  the  assumptions  of  the  book  men.  It  is  the  wisdom  of  the 
race  against  the  wisdom  of  the  few. 

Perhaps  the  best  argument  I  can  make  for  protection  is  to  state 
what  it  is  and  the  principles  on  which  it  is  founded. 

Man  derives  his  greatest  power  from  his  association  with  other 
men,  his  union  with  his  fellows.  Whoever  considers  the  human  be- 
ing as  a  creature  alone,  by  himself,  isolated  and  separated,  and  tries 
to  comprehend  mankind  by  mathematically  adding  these  atoms  to- 
gether, has  utterly  failed  to  comprehend  the  human  race  and  its 
tremendous  mission. 

Sixty  millions  even  of  such  creatures  without  association  are  only 
so  many  beasts  that  perish.  But  sixty  millions  of  men  welded  to- 
gether by  national  brotherhood,  each  supporting,  sustaining,  and 
buttressing  the  other,  are  the  sure  conquerors  of  all  those  mighty 
powers  of  nature  which  alone  constitute  the  wealth  of  this  world. 
The  great  blunder  of  the  Herr  Professor  of  political  economy  is 
that  he  treats  human  beings  as  if  every  man  were  so  many  foot- 
pounds, such  and  such  a  fraction  of  a  horse-power.  All  the  soul  of 
man  he  leaves  out. 

Think  for  a  moment  of  the  foundation  principles  involved  in  this 
question,  which  I  now  ask,  Where  does  wealth  come  from?  It 
comes  from  the  power  of  man  to  let  loose  and  yet  guide  those  ele- 
mental forces  the  energy  of  which  is  infinite.  It  comes  from  the 
power  of  man  to  force  the  earth  to  give  her  increase,  to  hold  in  the 
bellying  sail  the  passing  breeze,  to  harness  the  tumbling  waterfall, 
to  dam  up  the  great  rivers,  to  put  bits  in  the  teeth  of  the  lightning. 
Foot-pounds  and  fractions  of  a  horse-power  will  never  do  this.  It 
takes  brains  and  the  union  of  foot-pounds  and  fractions  of  a  horse- 
power working  harmoniously  together. 

To  grasp  the  full  powers  of  nature,  to  reap  the  richest  wealth  of 
the  world,  we  must  utilize  the  full  power  of  man,  not  merely  muscles 
and  brains,  but  those  intangible  qualities  which  we  call  energy,  vigor, 
ambition,  confidence,  and  courage.  Have  you  never  remarked  the 
wonderful  difference  between  a  sleepy  country  village,  lying  lazily 
alongside  an  unused  waterfall,  where  more  than  half  the  energy  of 
the  people  was  lost  for  lack  of  the  kind  of  work  they  wanted  to  do ; 
where,  whenever  three  men  met  together  in  the  road,  the  rest  looked 


556  REED 

out  of  the  windows,  idly  wondering  what  the  riot  was  about,  and 
that  same  village  after  the  banks  were  lined  with  workshops  and 
the  air  was  noisy  with  the  whirr  of  the  spindles,  and  every  man  was 
so  eager  to  work  that  there  never  seemed  hours  enough  in  the  day 
to  tear  from  the  powers  of  nature  their  imprisoned  richness  ? 

If  you  have,  you  have  also  seen  the  contrast  between  men  left  to 
themselves,  so  many  foot-pounds  and  fractions  of  a  horse-power,  and 
men  incited  by  hope,  spurred  on  by  ambition,  and  lighted  on  their 
way  by  the  confidence  of  success. 

For  a  nation  to  get  out  of  itself  or  out  of  the  earth  all  the  wealth 
there  is  in  both,  it  is  not  necessary  for  the  nation  to  buy  cheap  or 
sell  dear.  That  concerns  individuals  alone.  What  concerns  the 
nation  is  how  to  utilize  all  the  work  there  is  in  men,  both  of  muscle 
and  brain,  of  body  and  of  soul,  in  the  great  enterprise  of  setting 
in  motion  the  ever-gratuitous  forces  of  nature. 

How  shall  you  get  out  of  the  people  of  a  nation  their  full  powers. 
Right  here  is  precisely  the  dividing  line.  The  let-alone  school  say 
leave  individual  man  to  his  own  devices.  The  protectionist  school 
say  let  us  stimulate  combined  and  aggregated  man  to  united  en- 
deavor. What  made  men  work  before  governments?  Was  it  an  in- 
tellectual belief  that  work  was  good  for  the  muscles  ?  Not  the  least 
in  the  world.  It  was  hunger  and  desire.  Hunger  has  ceased  to  play 
the  greater  part,  but  desire  will  never  pass  away. 

In  the  ever-growing  desire  of  mankind  for  new  worlds  of  com- 
fort and  luxury  to  conquer  is  the  blazing  promise  of  the  unhasting, 
unresting  march  of  civilization.  In  that  column  of  march  the  whole 
nation  must  be  ranged.  Association  is  the  instinct  of  humanity 
which  grows  with  its  growth.  First  the  family,  then  the  tribe,  and 
then  the  nation.  The  race  will  come  by  and  by.  Faithfulness  to 
each  in  their  order  is  the  true  route  to  the  next. 

Here  in  the  United  States  are  60,000,000  people  with  all  the 
varied  characters  their  numbers  indicate.  Some  have  faculties  fit  for 
farming,  some  for  the  management  of  machinery,  some  for  invention. 
The  problem  before  you  is  what  system  will  get  from  all  these 
creatures,  so  different  from  each  other,  the  maximum  of  work  and 
wealth  and  wisdom. 

I  have  already  said  that  the  great  incentive,  the  motive  power  of 
man,  is  desire.    That  is  the  magnet  which  draws  him,  but,  like  all 


SPEECH  ON  THE  MILLS  BILL  557 

other  magnets,  it  must  be  put  near  the  armature.  The  quenching 
of  desire  must  not  cost  too  much.  The  pathway  to  its  accompHsh- 
ment  must  not  be  too  rugged.  If  you  say  to  him  who  loves  inven- 
tion and  hates  farming,  your  path  and  your  desire  lies  through  the 
cultivation  of  the  fields,  he  will  say  this  thing  costs  too  much.  If 
you  say  to  the  man  who  loves  the  fields,  your  way  must  be  through 
the  workshop,  you  bar  his  progress. 

There  is  only  one  way  to  get  the  best  work  out  of  men,  and  that 
is  to  give  each  the  work  he  can  do  best.  You  can  only  accomplish 
this  by  diversifying  industry.  To  diversify  industry  completely  in 
a  country  such  as  ours,  there  is  but  one  way  given  under  Heaven 
among  men.  To  enable  the  American  people  themselves  to  supply 
all  their  wants,  you  must  give  and  assure  to  the  American  people 
the  American  markets.  What  does  this  phrase  mean  in  practical 
life?  It  means  that  we,  the  nation,  say  to  capital,  "Embark  your- 
self in  the  manufacture  of  such  and  such  articles,  and  you  shall  have 
a  market  to  the  extent  of  the  wants  of  the  American  people." 

Capital  then  says  to  labor,  "  Go  with  me  into  this  new  field,  all  of 
you  who  like  this  work  best,  and  we  will  share  the  results."  Then 
begins  a  new  industry.  Multiply  this  by  hundreds  and  you  have  a 
community  where  every  man  honestly  minded  will  get  what  on  the 
whole  suits  him  best,  and  the  nation  will  get  the  greatest  amount  of 
work  from  the  greatest  number. 

To  this  system,  so  far  sketched,  no  human  being  can  find  reason- 
able objections.  But  it  is  averred  that  there  are  some  drawbacks. 
It  is  alleged  that  the  people  who  are  in  the  older  industries — those 
which  establish  themselves  without  law — have  to  pay  higher  prices 
for  the  articles  so  manufactured,  and  that  the  employment  in  new 
industries  is  all  at  their  expense.  This  does  not  in  the  least  touch 
upon  the  utilization  of  human  energy  and  natural  energy  which 
would  otherwise  run  to  waste.  It  does  not  touch  upon  the  question 
of  the  divine  right  of  those  who  are  adapted  to  the  older  industries 
to  reap  alone  the  riches  of  the  earth. 

So  seemingly  unjust  has  this  last  appeared  in  one  instance,  that 
of  the  land-owner,  that  a  prominent  free-trader,  Mr.  Henry  George, 
who  will  vote  next  election  for  revenue  reform,  has  proposed  to  take 
away  from  land  more  or  less  of  its  value  to  the  owner.  That  I  do 
not  agree  to,    I  make  no  reclamations  on  that  account. 


558  REED 

I  meet  the  question  squarely  and  asseverate  that  protection  does 
not  raise  prices.  The  opposite  statement  and  the  argument  which 
backs  it  up,  I  purpose  to  state  fairly,  for  we  now  come  to  the  famous 
revenue-reform  dilemma.  You  tell  us,  they  say,  that  protection  is 
for  the  purpose  of  enhancing  prices  to  enable  high  wages  to  be  paid, 
and  yet  you  say  that  protection  lowers  prices.  This  is  fiat  contra- 
diction. So  it  is  as  you  state  it.  But  your  statement,  like  all 
revenue-reform  statements,  liourishes   only  by  assumption. 

In  order  to  make  yourself  clear,  you  have  utterly  omitted  the 
element  of  time.  You  assume  that  we  say  that  both  our  statements 
of  higher  prices  for  higher  wages  and  lower  prices  for  consumers 
are  for  the  same  instant  of  time.  Not  so.  When  you  begin  there 
are  higher  prices  for  higher  wages,  but  when  you  establish  your 
manufactories,  at  once  the  universal  law  of  competition  begins  to 
work.  The  manufactories  abroad,  urged  upon  by  the  lower  prices 
which  the  tariff  forces  them  to  offer  in  order  to  compete  with  us, 
cause  every  element  of  economy  in  manufacture  to  be  set  in  motion. 
Every  intellect  is  put  to  work  to  devise  new  machinery  which  will 
produce  at  lower  cost,  to  seek  out  new  methods  of  utilizing  waste,  to 
consolidation  of  effort  to  lessen  general  expenses,  and  the  thousand 
and  one  devices  every  year  invented  to  get  more  work  out  of  the 
powers  of  nature. 

At  home  the  same  causes  are  at  work,  and  with  redoubled  energy, 
because  on  account  of  higher  wages  there  are  greater  inducements 
to  substitute  labor-saving  devices  for  costly  labor.  And  this  colossal 
struggle  between  two  great  empires  of  industry,  the  foreign  and  the 
domestic,  results  everywhere  in  the  cheapness  of  commodities,  in 
which  progress  of  cheapness  the  world  has  marched  on  in  one 
unbroken  undeviating  line,  until  to-day  the  citizens  of  the  United 
States,  the  sovereigns  of  to-day,  as  we  call  them  in  moments  of 
patriotic  exaltation,  the  poorest  citizens  have  for  the  commonest 
necessities  of  life  the  luxuries  of  the  sovereigns  of  old  days. 

That  lower  prices  will  come  at  once,  we  have  never  said.  That 
they  will  come  and  grow  lower  and  lower  so  that  in  the  series  of 
years  which  make  up  a  man's  life  all  he  needs  will  cost  him  less 
than  under  revenue  reform  we  asseverate  and  maintain,  and  all 
history  is  behind  our  asseverations. 


SPEECH  ON  THE  MILLS  BILL  559 

But  would  not  all  this  take  place  under  free  trade;  would  not 
English  manufactures,  supplying  all  the  world,  have  grown  thus 
cheaper  by  themselves  ?  Let  me  answer  this  question  by  two  others. 
Do  you  believe  in  the  lowering  of  prices  by  competition  ?  Of  course 
you  do.  Do  you  believe  that  the  great  production  of  $7,000,000,000 
of  manufactures  have  not  entered  into  competition  with  those  of 
England?  You  know  that  they  have  been  the  great  power  which 
has  forced  English  prices  down. 

Do  you  want  an  example  of  to-day?  In  1883  the  importers  were 
eager  to  prevent  the  increase  of  the  tariff  on  pottery.  I  know  it, 
because  a  gentleman  was  here  earnestly  urging  me  not  to  consent  to 
the  increase.  Only  three  years  afterwards  he  acknowledged  to  me 
that  the  foreign  manufacturers  were  obliged,  in  the  face  of  the 
great  increase  of  product,  both  in  quantity  and  quality,  to  cut  their 
prices  so  as  to  pay  even  more  than  the  tariff  tax.  Perhaps  some 
revenue  reformer  may  ask  me,  on  the  strength  of  this  example,  how 
our  raising  tariff  helped  manufacturers  here  if  the  foreign  manu- 
facturer lowered  his  prices. 

I  am  glad  to  answer  that  question,  for  it  answers  many  others. 
Before  the  raise,  we  were  on  pottery  fighting  foreigners  gorged  with 
profits  and  flushed  with  the  spoils  of  our  markets.  To-day  we  are 
fighting  them  on  even  terms,  or  would  have  been,  but  for  the 
package  clause.  Their  profits  would  be  going  into  our  treasury,  not 
into  their  pockets,  and  between  them  and  us  would  still  be  going  on 
that  equal  contest  for  cheaper  and  cheaper  manufactures  which, 
without  lowering  wages,  is  giving  us  every  day  lower  prices  and  an 
ever-widening  manufacture. 

Perhaps  some  gentleman  will  say  to  me  that  this  is  all  a  dream; 
that  the  very  fact  of  a  barrier  raised  by  our  tariff  prevents  competi- 
tion. Every  manufacturer  knows  better.  England  must  work  or 
starve.  She  has  piled  up  her  capital,  and  if  she  can  not  get  large 
profits  she  will  take  small.  Let  me  not  confine  myself  to  theory. 
Let  me  once  more  recall  that  tremendous  fact  about  Russia.  In 
1876,  three  years  before  her  tariff,  she  bought  8,000,000  hundred- 
weights of  British  metals  at  $30,000,000,  8  for  30.  In  1883,  four 
years  after  the  tariff,  she  bought  the  same  amount,  8,000,000  hundred- 
weights for  $17,000,000,  8  for  17,  $3.75  per  hundred-weight  before. 


S6o  REED 

$2.i2i  after.    Was  that  the  effect  of  the  Russian  tariff  alone?    Not 
so.    It  was  the  effect  of  tariffs  the  world  over. 

Let  me  show  the  same  fundamental  fact  on  a  larger  scale.  I  have 
here  the  report  of  the  Royal  Commission  to  inquire  into  the  causes 
of  the  depression  of  British  trade.  There  is  much  matter  of  excellent 
admission  throughout  that  work,  but  one  paragraph  will  serve  my 
present  purpose.  It  is  on  the  page  numbered  xii,  where  you  will 
find  that  the  exports  in  1883  were  £240,000,000,  but  that  the  value 
of  those  same  exports  at  the  prices  of  ten  years  before  were 
£349,000,000. 

The  difference  is  £109,000,000 — $545,000,000.  If  you  want  it  in 
percentage,  you  will  find  that  you  must  add  more  than  45  per  cent, 
to  the  price  of  1883  to  get  the  richly  profitable  prices  of  1873.  To 
what  does  the  world  owe  this  gain  of  $545,000,000  in  a  single  year? 
Who  was  the  fruitful  mother  of  all  this  gain? 

She  whom  in  your  short-sighted  wisdom  you  have  always  called 
barren,  tariff  taxes ;  and  facing  your  most  opprobrious  phrase,  the 
one  you  roll  most  lovingly  under  your  tongue,  I  dare  to  asseverate 
that  if  the  whole  world  will  repeal  its  tariff  taxes,  England  will  reap 
in  the  next  ten  years  not  only  ten  times  these  five  hundred  and 
forty-five  millions,  but  a  thousand  millions  more  every  year.  Tariff 
taxes  !  How  men  like  to  fool  themselves  with  phrases  !  Because  the 
taxing  power  is  used  not  only  for  revenue  but  as  the  barrier,  and 
taxes  are  odious,  therefore  the  barrier  must  be  odious  also.  How 
can  taxes  produce  ?  This  is  only  mere  word-trifling.  Can  you  keep 
cattle  out  of  the  cornfield  by  sticking  wood  into  the  ground?  Yes, 
if  you  make  a  fence. 

Do  you  mean  to  tell  me,  said  the  wise  bumpkin  to  the  engineer  on 
the  banks  of  the  Merrimac — do  you  mean  to  tell  me  that  you  can 
make  that  stream  useful  by  putting  rocks  into  it?  Yes,  said  the 
engineer,  as  he  proceeded  to  build  his  dam  and  set  in  motion  the 
water-wheels  of  mighty  Lowell. 

I  have  said  that  the  professor  of  political  economy  treats  man  as 
a  soulless  aggregation  of  foot-pounds.  Let  me  give  you  a  striking 
example  of  this  humanizing  science. 

Speaking  of  shorter  hours  of  labor  the  British  Commission  report, 
from  which  I  have  quoted,  says,  page  xxi,  paragraph  82,  speaking 
of  shorter  Jipurs  of  labor : 


SPEECH  ON  THE  MILLS  BILL  561 

''It  must  be  for  the  country  and  the  workman  himself  to  decide 
whether  the  advantages  of  shorter  hours  compensate  for  the  increased 
cost  of  production  or  diminished  output.  We  believe  that  they  do, 
and  on  social  as  well  as  on  commercial  grounds  we  should  regret  to 
see  any  curtailment  of  the  leisure  and  freedom  which  the  workman 
now  enjoys.  No  advantage  which  could  be  expected  to  accrue  to 
the  commerce  of  the  country  would,  in  our  opinion,  compensate  for 
such  a  change." 

On  the  commission  was  Bonamy  Price,  the  only  recognized  pro- 
fessor on  it,  and  here  is  his  sole  contribution  to  this  volume: 

"I  beg  to  express  my  dissent  from  paragraph  82.  It  contains  a 
specified  repudiation  of  the  great  doctrine  of  free  trade.  [Great  is 
Diana  of  the  Ephesians.]  Shorter  hours  of  labor  do  not  and  can  not 
compensate  to  a  nation  for  increased  cost  of  production  or  diminished 
output.  They  tax  the  community  with  dearer  goods  in  order  to 
confer  special  advantages  on  the  working  man.  They  protect  him, 
and  that  is  a  direct  repudiation  of  free  trade.  The  country  is  sen- 
tenced to  dearer  and  fewer  goods." 

He  is  right,  the  dear  professor,  though  rather  crisp  and  brutal. 
Shorter  hours  and  higher  wages  are  "  direct  repudiations  of  free  trade." 

Let  me  now  treat  you  to  an  argument  for  protection  in  America 
out  of  Bastiat.  Frederick  Bastiat,  of  France,  was  the  brightest  free- 
trader that  ever  charged  down  the  lines.  No  man  can  refuse  the  trib- 
ute of  admiration  to  the  wonderful  play  of  that  subtle  intellect.  He  has 
furnished  the  other  side  most  of  its  brains  and  all  its  dialectics. 

Yet  while  he  is  arguing  free  trade  for  France,  I  think  he  has 
proved  protection  for  America.  Talking  to  Frenchmen,  he  says: 
"I  say,  and  I  think  so  very  sincerely,  that  if  two  countries  find  them- 
selves placed  in  unequal  conditions  of  production,  it  is  that  one  which 
is  the  least  favored  of  nature  which  has  the  most  to  gain  by  liberty 
of  exchanges^ 

He  proves  his  case  this  way.  Labor  is  the  sole  cost.  All  the  rest 
is  the  gratuity  of  nature.  Whatever  labor  produces  in  one  land  more 
than  the  same  labor  in  another  land  is  difference  of  gratuity  only. 
It  is  the  measure  of  relative  richness  of  the  two  countries.  If  one 
man  should  discover  rich  soil  he  would  alone  reap  the  gratuity.  If 
ten  thousand  men  discover  it  the  principle  of  competition  comes  in 
and  the  gratuity  goes  to  consumers.    If  one  farm  could  double  its 


562  REED 

fertility,  the  owner  would  be  richer.  If  all  the  farms  doubled  their 
fertility,  the  whole  gratuity  would  go  over  to  the  consumers.  Let  me 
illustrate  that  by  something  which  Bastiat  never  knew,  for  he  died 
forty  years  ago. 

If  one  railroad  alone  in  this  country  had  had  steel  rails,  all  the 
benefit  of  that  would  have  gone  to  the  company.  But  when  all  the 
companies  had  them,  and  thereby  could  do  their  work  cheaper  and 
so  save  vast  amounts  of  money,  some  railroad  presidents  looked 
for  big  dividends.  What  happened?  Why  each  one  said  I  can  get 
a  little  more  business  if  I  do  it  cheaper,  and  get  the  same  results. 
Then  they  began  to  compete,  and  the  final  result  now  is  that  that 
magnificent  gift  of  nature,  through  Sir  Henry  Bessemer,  the  differ- 
ence between  the  strong,  long-lived  steel  rail,  and  the  weak,  short- 
lived iron  rail,  has,  every  dollar  of  it,  gone  to  the  people,  making 
cheap  transportation  instead  of  big  dividends. 

Let  my  poor  scared  friend  who  covers  his  head  with  the  bed- 
clothes at  night  lest  he  should  be  devoured  by  monopolies  take  cour- 
age. The  Great  Maker  of  this  universe  knows  how  to  get  His  gifts 
distributed  to  His  children.  Since,  then,  the  gratuitous  part  must  be 
distributed,  it  follows,  as  Bastiat  claims,  that  exchange  is  the  barter 
of  values,  and  value  being  reduced  by  competition  to  represent  work, 
exchange  is  the  barter  of  equal  works,  and,  therefore,  in  free  trade 
the  richest  country  gives  the  most ;  in  fact,  it  levels  itself  down  and 
levels  the  other  countries  up. 

Now,  which  is  the  richest,  Europe  or  America  ?  We  are  all  agreed 
on  that.  We  say  America  because  our  eyes  behold  it.  You  say  so 
because  your  eyes  behold  it,  and  you  see  one  thousand  millions  wasted 
besides.  What  do  you  mean  to  do  ?  I  will  tell  you  what  we  mean  to 
do.  We  mean  to  keep  this  wealth  here.  We  mean  to  do  it  even  if 
we  build  a  "Chinese"  wall  of  tariff  taxes  around  this  country. 

Let  me  give  this  great  truth  of  Bastiat's  another  application. 
Nature  produces  all.  That  is  the  origin  of  the  much-abused  phrase, 
"The  farmer  pays  all."  Whenever  the  farmer  goes  beyond  his 
farm  for  the  gratification  of  his  desires,  Bastiat,  the  free-trader, 
shows  that  he  must  then  share  his  riches.  Now  whom  shall  he  share 
it  with,  the  mechanic  at  home  or  the  mechanic  abroad,  his  fellow- 
citizen  or  an  alien?    Which  is  for  his  interest? 


SPEECH  ON  THE  MILLS  BILL  563 

Let  me  put  it  in  other  phrase.  Which  is  it  better  for  a  farmer 
to  do,  send  his  surplus  wheat  a  thousand  miles  to  the  sea-coast, 
three  thousand  miles  across  the  water,  pay  the  freight,  sell  it  to 
the  mechanic  who  gets  less  wages,  or  sell  it  right  here  at  home  to 
the  mechanic  who  gets  more  wages  ?    The  answer  seems  obvious. 

The  minor  arguments  for  free  trade  are  exceedingly  simple. 
Reasoning  in  a  circle  always  is.  There  is  nothing  so  compact  as 
begging  the  question.  Truth  is  difficult.  "Easy  as  lying,"  is  a  prov- 
erb. Says  a  learned  professor,  "If  under  your  tariff  I  can  buy  for 
a  bushel  of  wheat  in  Liverpool  the  same  articles  for  which  I  pay  in 
New  York  a  bushel  and  a  peck,  will  anybody  tell  me  I  don't  lose 
a  peck  of  wheat,  and  lose  it  by  your  tariff?"    Looks  so,  doesn't  it? 

But  there  are  two  assumptions  you  perceive  on  examination ;  first, 
that  under  free  trade  American  wheat  will  be  as  high  at  Liverpool 
and  British  wares  as  low.  In  other  words  the  learned  professor 
assumes  that  two  bushels  of  wheat  bidding  for  one  set  of  wares  will 
get  them  at  the  same  price  as  when  two  sets  of  wares  are  bidding  for 
one  bushel  of  wheat.  Verily  this  seemeth  to  be  the  very  thing  we 
are  discussing.  This  was  the  very  point  the  learned  professor  started 
out  to  prove. 

Mr.  Frank  Hurd,  the  melodious  child  of  free  trade,  is  now  trav- 
ersing this  country  founding  a  great  oration  on  the  same  convincing 
argument.  If  a  laborer  with  two  dollars  in  his  pocket  won  in  a  day 
in  protectionist  America  can  buy  in  Liverpool  for 'one  dollar  what 
he  wants,  and  you  make  him  pay  two  dollars  to  the  Rhode  Island 
manufacturers  don't  you  cheat  him  every  day  out  of  half  his  day? 
Dear,  departed  friend,  first  great  martyr  in  this  great  cause,  why  not 
put  it  the  other  way  ?  If  a  poor  laboring  man  in  free  trade  America 
without  a  cent  in  his  pocket,  and  perhaps  no  pocket  in  his  trousers, 
should  find  out  that  things  cost  the  same  in  Rhode  Island  and  Liver- 
pool, would  the  happiness  he  would  undoubtedly  feel  be  anything 
more  than  an  intellectual  delight  ? 

There  are  only  two  fallacies  in  this  foundation  stone  of  the  new 
Jerusalem.  The  little  one  is  that  what  costs  one  dollar  in  Liverpool 
will  cost  two  in  Rhode  Island.  This  is  rhetoric.  Let  us  pass  the 
rhetoric.  The  big  one  is  that  the  laborer  will  get  his  two  dollars 
under  free  trade,  and  goods  at  Liverpool  will  be  cheap.    This  is 


564  REED 

assumption.  I  not  only  point  out  that  all  this  is  assertion  and  not 
proof,  but  I  think  I  can  prove  the  contrary. 

You  asseverate  that  if  part  of  the  people  now  there  left  manufac- 
tures and  went  on  the  land  and  produced  more  wheat  we  could 
supply  ourselves  thereby  with  the  manufactures  we  failed  to  make 
and  have  a  profit,  because  on  our  fertile  lands  we  can  make  wheat 
cheaper  than  hardware.  Perfectly  true,  if  prices  would  obligingly 
keep  the  same. 

What  makes  wheat  so  cheap  to-day  ?  So  many  unexpected  thou- 
sand bushels  from  India.  Would  not  the  same  number  of  extra 
bushels  in  America  have  done  the  same  ?  W' ould  not  so  many  extra 
bushels  from  America  added  to  so  many  extra  bushels  from  India 
•  drive  it  down  at  more  than  double  the  per  cent.?  British  prices  are 
low  because  the  outside  world  manufacturing  for  itself  won't  buy, 
and  these  prices  have  been  forced  down,  say  the  board  to  investigate, 
etc.,  57  per  cent,  from  1873  to  1885.  More  wheat  from  America 
would  lower  prices  of  wheat  just  as  more  manufactures  under  tariff 
have  lowered  prices  of  goods.  What  a  jolly  rise  those  same  prices 
would  have  if  we  supplied  our  lost  manufactures  by  import. 

The  great  folly  of  this  most  taking  free-trade  argument  is  the 
reasoning  from  the  individual  to  the  nation.  If  you  should  suspend 
the  tariff  laws  for  a  single  man  he  could,  beyond  a  doubt,  buy  in 
Liverpool  for  a  bushel  of  wheat  what  in  New  York  costs  a  bushel 
and  a  peck.  Bu^ would  it  not  be  the  same  if  the  laws  were  suspended 
as  to  all?  By  no  manner  of  means.  "Why  not,"  says  the  free- 
trader ;  "is  not  the  nation  made  up  of  individuals  ?  "  Certainly  ;  but 
compared  with  one  individual  the  universe  is  practically  unlimited. 
He  can  move  round  and  disturb  nothing.  Sixty  millions  of  him  make 
a  big  disturbance  when  they  move. 

Let  me  give  you  an  illustration  from  Wall  street.  I  suppose  that 
when  a  distinguished  man,  an  ex-minister  to  England,  which  is  the 
least  of  his  distinctions,  a  man  whose  perceptions  are  of  such  deli- 
cacy that  the  present  President  reminds  him  of  Abraham  Lincoln,  of 
blessed  memory,  has  without  reproach  compared  protection  to  three- 
card  monte,  I  may  refer  to  Wall  street  without  censure. 

The  gentleman  from  Pennsylvania  who,  by  the  wisdom  of  the 
Speaker,  so  well  represents  the  wishes  of  his  State  on  the  Committee 
on  Ways  and  Means  was  once  an  honored  director  in  the  Lake 


SPEECH  ON  THE  MILLS  BILL  565 

Shore  and  is  now  an  honored  director  in  the  Canadian  Pacific.  Sup- 
pose he  were  to  say  to  one  of  his  friends — to  me,  for  instance,  for 
I  like  to  dream  of  such  a  good  thing — you  have  a  hundred  shares 
of  Lake  Shore.  They  pay  4  per  cent,  and  sell  at  92.  Canadian 
Pacific's  sell  at  59  and  pay  3  per  cent.  Canadian  Pacific  is  a 
better  road.  Interstate-commerce  bill  favors  it  and  the  President  is 
friendly. 

Sell  your  100  Lake  Shore  and  buy  156  Canadian.  You  will  get 
$468  instead  of  $400  for  income  and  lots  of  nice  chances.  I  could 
do  that  as  per  programme.  My  sale  of  100  Lake  Shore  would  not 
depress  that  stock.  My  purchase  would  not  raise  the  Pacific.  But 
suppose  5,000  men  tried  the  same  transfer — nay,  500 — what  would 
be  the  result?  Canadian  Pacific  would  go  up  like  a  rocket  and 
Lake  Shore  down  like  a  stick,  and  there  would  be  500  badly  dis- 
appointed men,  and  the  more  of  them  there  were  the  more  disap- 
pointed they  would  be.  If  ever  the  Democratic  party,  under  the 
lead  of  the  learned  professor,  on  the  ground  that  one  man  can 
save  a  peck  of  wheat  by  trading  with  Liverpool  instead  of  New 
York,  puts  this  whole  nation  at  the  mercy  of  Liverpool,  we  shall  be 
a  lucky  people  if  we  get  back  the  basket. 

People  say  that  these  tariff  discussions  are  dull  and  tiresome, 
but  there  are  always  delightful  things  in  them.  I  don't  know  when 
I  have  bathed  my  weary  soul  in  such  a  reverie  of  bliss  as  I  did  while 
the  chairman,  by  the  aid  of  Edward  Atkinson,  and  the  grea.t  doctrine 
of  labor-cost,  was  explaining  that  the  high  wages  of  our  work  people 
were  not  an  obstacle,  but  the  very  reason  itself  why  the  whole  cir- 
cumambient atmosphere  should  be  flooded  with  the  pauper  sunshine 
of  Europe. 

The  more  you  pay  the  workman  the  less  the  "labor-cost."  The 
more  you  give  your  shoemaker  the  less  the  shoes  cost.  The  former, 
he  explained,  is  the  cause  of  the  latter.  Less  "labor-cost"  is  pro- 
duced by  higher  wages.  The  higher  the  wages  the  lower  the  labor- 
cost.  No  limitation,  of  course,  was  set  to  so  divine  a  principle.  The 
only  limit  to  lowness  of  "labor-cost"  is  our  generosity  to  the  laboring 
man.  Give  infinite  dollars  to  the  laboring  man  and  things  will  cost 
nothing.  Surely  no  frantic  orator  on  labor  day,  the  session  before 
election,  ever  offered  to  the  horny-handed  sons  of  toil  such  a  sweet 
boon  as  the  great  doctrine  of  "labor-cost." 


566  REED 

But  softly,  my  friends.  This  is  not  the  millennium.  It  is  not  the 
Heavenly  Jerusalem  newly  descended.  It  is  only  the  old  Jerusalem 
of  the  Jews,  sacred  but  ancient.  It  is  the  old,  old  fact  that  the 
smarter  the  workman  the  better  the  pay,  and  the  manufacturer 
makes  more  out  of  him  besides.  It  is  not  an  absolute  fact.  It  is  a 
relative  one.  It  only  means  that  a  better  workman  in  the  same  coun- 
try can  get  better  pay  than  a  poor  one,  and  is  worth  it  and  a  per- 
centage over.  It  is  a  valuable  fact,  but  it  is  an  old  one,  and  if  Mr. 
Atkinson,  reputed  an  able  man,  ever  gave  such  an  extension  to  that 
idea  as  his  pupil  has  he  must  be  one  of  those  men  who  discover  a 
full-fledged  planet  with  moons  whenever  an  asteroid  comes  within 
his  field  of  vision. 

But  the  pleasure  given  by  the  great  doctrine  of  "labor-cost"  is 
soon  lost  in  the  admiration  of  the  cool  courage  of  what  follows. 
Stimulated  by  the  theory  of  "labor-cost,"  the  chairman  ordered  an 
investigation  into  the  oldest  manufactories  in  New  England.  What 
was  the  result?  Why,  constantly  increasing  wages  and  constantly 
decreasing  cost ;  the  two  very  things  his  side  has  sneered  at  since 
tariff  debates  were  invented,  higher  wages  for  the  worker  and 
lower  prices  for  the  consumer. 

What  industries  did  he  select?  Cotton  sheetings  and  cotton 
prints;  cotton  goods,  the  very  articles,  and  perhaps  the  only 
articles  which  have  had  continuous,  unbroken,  effective  protection 
since  1824.  He  selects  industries  which,  under  all  tariffs,  have  had 
sixty-four  years  of  solid  protection,  shows  by  them  higher  wages  for 
labor  and  lower  prices  for  consumers,  then  boldly  wraps  the  flag 
of  labor-cost  about  him  and  proclaims  to  a  wondering  world  that 
tariff  has  nothing  to  do  with  wages.  I  wonder  what  Edward  Atkin- 
son thought  of  his  new  disciple  at  that  moment. 

Oh,  no;  tariffs  have  nothing  to  do  with  wages.  It  is  coal  and 
steam  and  machinery.  But  what  set  up  the  machinery?  What 
caused  the  cotton  factory  to  be  built?  Why,  the  tariff.  So,  then, 
the  tariff  built  the  mill,  set  up  the  machinery,  the  machinery  in- 
creased the  wages,  but  the  tariff  did  not.  Is  not  that  very  much  like 
saying  your  father  was  your  progenitor,  but  your  grandfather  wasn't. 
How  could  you  improve  machinery  you  didn't  have  ?  How  could  you 
increase  the  efficiency  of  machinery  that  didn't  exist? 


DATE  DUE 

'' 

jt       AUG 

3    1978 

! 

;^ICD  AUG  ' 

.1  1978 

MAY  ?' 

lQft7 

ntc'o  imu  198 

7 

( 

^nnn 

S9 

ULU    |/   L 

CAYLORD 

PBINTED  IN  U    S    A 

Jill  lliilil  III 

3   1970  00584  3 


